8 . Individual Problems 14-6At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate). Students with Early ClassesStudents without Early ClassesCoffee7060Banana51101 The marginal cost of coffee is 10 and the marginal cost of a banana is 40.The café owner is considering three pricing strategies:1.Mixed bundling: Price bundle of coffee and a banana for 161, or just a coffee for 70.2.Price separately: Offer coffee at 60, price a banana at 101.3.Bundle only: Coffee and a banana for 121. Do not offer goods separately. Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle.For simplicity, assume there is just one student with an early class, and one student without an early class.Price StrategyRevenue from Pricing StrategyCost from Pricing StrategyProfit from Pricing Strategy1. Mixed Bundling 2. Price Separately 3. Bundle Only Pricing strategy yields the highest profit for the café owner.

Indirect price discrimination requires identifying some potential product feature that is correlated…

Answered: Assume that if the price of an item or…

Essentials of Economics (MindTap Course List)

8th Edition

ISBN:9781337091992

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter14: Monopoly

Section: Chapter Questions

Problem 6PA

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8 . Individual Problems 14-6

At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate).

	Students with Early Classes	Students without Early Classes
Coffee	70	60
Banana	51	101

The marginal cost of coffee is 10 and the marginal cost of a banana is 40.

The café owner is considering three pricing strategies:

1.	Mixed bundling: Price bundle of coffee and a banana for 161, or just a coffee for 70.
2.	Price separately: Offer coffee at 60, price a banana at 101.
3.	Bundle only: Coffee and a banana for 121. Do not offer goods separately.

Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle.

For simplicity, assume there is just one student with an early class, and one student without an early class.

Price Strategy	Revenue from Pricing Strategy	Cost from Pricing Strategy	Profit from Pricing Strategy
1. Mixed Bundling
2. Price Separately
3. Bundle Only

Pricing strategy yields the highest profit for the café owner.

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