2. Suppose Bernard is the only supplier of both coffee and donuts in Smalltown.

Question

2. Suppose Bernard is the only supplier of both coffee and donuts in Smalltown. The cost of producing the goods is zero. Bernard sells coffee for $3 and donuts for $3. In a typical hour, 5 costumers buy just one coffee, 4 buy just one donut, and 3 costumers buy one of each. The owner finds that those who buy only coffee would also buy a donut if the donut were $2. And those who buy only a donut would also buy coffee if the coffee were $1. If he is considering offering a coffee +donut bundle, so that consumers could buy either just coffee, just donuts, or both of them bundled together, what price for the bundle will maximize his profits

Explanation / Answer

At the current price of $3 for both coffee and donuts, currently the profits are 5 x 3 + 4 x 3 + 3 x (1 x 3 + 1 x 3) = 45

There are three choices for bundled price: $4, $5, and $6.

Optimum bunlde price is $5 and the separate prices are $3 for each donut and coffee. This is because at this pricing, those who buy dounts at $3 and are likely to buy the bundle, find that it is beyond their willingness and so they buy only donuts. Profit from them is $3*4 = $12. Profit from other consumer types = (5 + 3)* 5 = $40. Total profit = $52.

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