In the table below, we consider how Alex, Tyler, and Monique would fare under à
ID: 1141155 • Letter: I
Question
In the table below, we consider how Alex, Tyler, and Monique would fare under à la carte pricing and under bundling for cable TV when there are two channels: Lifetime and the Food Network Alex and Tyler like to watch Project Rumuy so they each place a higher value on Lifetime than on the Food Network. Monique is practicing to be an Iron Chef in her second life and so she places a higher value on the Food Network than on Lifetime. Maximum Willingness to Pay Alex Tyler Monique Lifetime The Food Network The Bundle 10 17 19 12 a. If the channels are priced individually, the most profitable prices for the cable b. Let's just check to see if these prices really are profit-maximizing.What would c. At the profit-maximizing prices, how much total consumer surplus would there d. Now consider what happens under bundling: Customers get a take-it-or-leave-it operator turn out to be 10 for Lifetime and 7 for the Food Network.At these prices, who buys what channel and how much profit is there? profit be if the cable company raised Lifetime to a price o work to a price of 8? and Food Net- be for the three of them? (Recall that consumer surplus is just each customers willingness to pay minus the amount each person actually paid.) offer of both channels or nothing at all.The profit-maximizing bundle price turns out to be 12, and at that price, Alex, Tyler, and Monique all subscribe. How much consumer surplus is there at this price? How much profit? And, most important, what would profit equal if the cable company raised the price to 13 instead?Explanation / Answer
a).
Consider the given problem here there are three consumers “Alex”, “Tyler” and “Monique”. Now, their willing ness to is given in the question for different channels.
If channels are priced individually the most profitable price for cable operator is “10 for Lifetime” and “7 for Food Network”. So, under this pricing “Alex” and “Tyler” will purchase the “Life time”. Similarly, “Alex” and “Monique” will purchase “the Food Network”. So, here the total profit will be “10*2 + 7*2 = 34”.
b).
Now, if the cable company raised the price of “Lifetime” to “11” and “Food Net-work” to “8”. So, under this pricing only “Tyler” will purchase the “Life time”. Similarly, only “Monique” will purchase “the Food Network”. So, here the total profit will be “11*1 + 8*1 = 19”.
c).
If channels are priced individually the most profitable price for cable operator is “10 for Lifetime” and “7 for Food Network”. So, here the consumer surplus is given by.
=> (15-10) + (10-10) + (9-7) + (7-7) = 5 + 2 = 7 = Consumer Surplus.
So, under the profit maximizing pricing the “consumer surplus” is “7”.
d).
Now, under the bundling case the profit maximizing price is “12”, where all the consumers will subscribe. So, here the total profit will be, “12*3 = 36”. So, here under this case the consumer surplus is given by, “(17-12) + (19-12) + (12-12) = 5 + 7 = 12 = Consumer Surplus.
Now, assume that price increases to “13”, where not all the consumers will subscribe but only “Alex” and “Tyler” will subscribe. So, here the total profit will be, “13*2 = 26”. So, here under this case the consumer surplus is given by, “(17-13) + (19-13) = 4 + 6 = 10 = Consumer Surplus.