Question 3: Pricing Multiple Product Versions (show all work) Casey’s company pr

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Question 3: Pricing Multiple Product Versions (show all work)

Casey’s company produces two versions of a software program, “Advanced” and “Basic”.

There are 3 segments of customers, the Managers, Executives and Students, and the respective segment sizes are 2000, 1000 and 5000. The per-unit cost of producing the Advanced version is $20, while the per-unit cost of producing the Basic version is $10. The willingness to pay (WTP) for each version, by segment, is given as follows:

WTP (Managers) = $100 (Advanced) and $55 (Basic)

WTP (Executives) = $62 (Advanced ) and $45 (Basic)

WTP (Students) = $45 (Advanced ) and $30 (Basic)

If Casey sells only the Advanced version, what is the optimal price it should charge and the profits? (Answer: $45, Profit=$200K)

If Casey decides to sell both versions, what are the optimal prices it should charge for each version? What is the optimal profit of the company? Assume that customers will buy if consumer surplus is at least 0 and that they need at least $1 extra in consumer surplus to switch between product versions. (Answer: Basic @ $30, Advanced @ $74, Profit=$228K)

Explanation / Answer

(2)

Advanced Basic Cost 20 10 Segment Size Managers 2000 Price 100 55 Executives 1000 Price 62 45 Students 5000 Price 45 30 Segment Size Profit from Advanced Profit from Basic Managers 2000 80 45 Executives 1000 42 35 Students 5000 25 20 If Price= 100, then only managers will buy and the profit will be 100-20, 80 per unit 2000*80 160000 If Price= 62, then managers and executives will buy and the profit will be 42 per unit (2000+1000)*42 126000 If Price= 45, then everyone will buy and the profit will be 25 per unit (2000+1000+5000)*25 200000 So Optimum Price is 25 which resukts maximim profit od 200000

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