Problem 1: The average consumer at a firm with market power has an inverse demand function of P = 10 - Q. The firm's cost function is C = 2Q. If the firm engages in optimal two-part pricing, it will earn profits of:
- $2.
- $32.
- $64.
- none of the statements associated with this question are correct.
Problem 2: Suppose three consumers of a new computer system have the following preferences for printers and ink, the prices in the columns represent the consumer's reservation price:
Consumer Printer Ink
1 $400 $175
2 $350 $100
3 $300 $200
The firm's costs are zero (for simplicity). If the manager knows the consumer's preferences, what is the optimal pricing strategy?
- printer $400, ink $100
- printer $300, ink $175
- bundle the printer and the ink at $500
- bundle the printer and the ink at $450