PLEASE, DON\'T SEND ME THE PHOTOGRAPHED ANSWER I DONT UNDERSTAND THE WRITING. TH

Question

PLEASE, DON'T SEND ME THE PHOTOGRAPHED ANSWER I DONT UNDERSTAND THE WRITING. THANKS

You are the manager of a local sporting goods store that rents skis and ski bindings. A typical consumer demand function over a month for skis is given by is P = 100 - 10Q and the firms cost function is TC = 20Q

a. Determine the optimal number of skis to put in a package and the optimal price to charge if the firm utilizes a block pricing strategy.

b. What is the optimal two part pricing strategy?

c. How much additional profit will sporting goods store earn using two-part pricing and block pricing strategy compared to the traditional pricing strategy?

d. Suppose the local sporting goods store does not know its demand function, but knows that there are three consumer types that have different willingness to pay for skis and ski bindings as follows:

The firm can price the two products separately or it can sell the products in a bundle for a single price. If the price of a bundle is $37, how many bundles will the firm sell, and is this the optimal price for the firm? Explain and demonstrate your answer. Assume that there are no costs to the firm and that each consumer type consists of 5 individuals.

Explanation / Answer

Answer:

a) To find block pricing lets first set inverse demand curve equal to MC as follows:

100-10Q = 20

Q = 80/10 = 8

Seller will sell 8 units in a package to consumers

Now put Q = 8 into inverse demand function

P = 100 - 10(8) = 20

Thus block price of a package is $20

b) To find two part tariff we set price per unit equal to MC thus Price per unit charge will be $20

and Consumer surplus will be cover price that is (1/2b) (a-P)2 = (1/2*10) (100-20)2 = 320

Hence cover price will be 320 and price per charge will be $20 per unit.

c) If traditional pricing policy was used:

TR = P*Q = 100Q-10Q2

MR = 100-20Q

put MR = MC

MC = dTC/dQ = 20

100-20Q = 20

Q = 4

thus P = 100-10(4) = $60

Profit = TR - TC = 60*4 - 20*4 = 240 - 80 = $160

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