Question

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 73 63
Banana 53 103
The marginal cost of coffee is 5 and the marginal cost of a banana is 20.
The café owner is considering three pricing strategies:
1. Mixed bundling: Price bundle of coffee and a banana for 166, or just a coffee for 73.
2. Price separately: Offer coffee at 63, price a banana at 103.
3. Bundle only: Coffee and a banana for 126. 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.

Answer 1

Based on the prices, the willingness to pay of the students and the costs, the profits will be:

• Mixed bundling = 209.
• Price separately = 199.
• Bundle Only = 202.

The pricing strategy that yields the highest profit is the Mixed bundling strategy.

What is the profit from Mixed bundling?

First find the willingness to pay for both the students with early classes and those without.

Student with early classes:                     Students without early classes:

= 73 + 53                                                       = 63 + 103

= 126                                                             = 166

At a mixed bundling price of 166, only students without early classes will be able to afford the bundle as their willingness to pay is 166.

Student with early classes will only take the coffee at 73 because their willingness to pay of 126 is lower than the 166 bundle price.

Profit is:

= (Bundle price + Coffee price) - (Marginal cost of two coffees + Marginal cost of banana)

= (166 + 73) - (2 x 5 + 20)

= 209

What is the profit from pricing separately?

At separate only pricing students without early classes will be able to afford the both things at 166.

Student with early classes will only take the coffee at 63 because their willingness to pay of 126 won't allow them to take both items.

Profit:
= (63 + 63 + 103) - (2 x 5+ 20)

= 199

What is the profit from price separately?

At a bundle only price of 126, both the students with early classes and those without early classes will be able to afford the bundle as their willingness to pay, match the price.

Profit will be:
= (126 + 126) - (2 x 5 ) for coffee - (2 x 20) for bananas

= 202

In conclusion, the woman should go with the Mixed bundling as it gives the highest profit of 209.

Find out more on pricing strategies at brainly.com/question/7303679.