Microsoft sells two types of office software, a word processor it calls Word and
ID: 1194110 • Letter: M
Question
Microsoft sells two types of office software, a word processor it calls Word and a spreadsheet it calls Excel. Both can be produced at zero marginal cost. The two types of consumers for these products exist in roughly equal proportions in the population: authors, who are willing to pay $120 for Word and $40 for Excel, and economists, who are willing to pay $50 for Word and $150 for Excel. Suppose that Microsoft execs decide to sell Word and Excel separately. What price should Microsoft set for Word? What price should Microsoft set for Excel? a. $150 for Excel,$120 for Word b. $40 for Excel, $50 for Word c. $120 for Word, $150 for Excel d. $85 for Word, $95 for Excel Microsoft sells two types of office software, a word processor it calls Word and a spreadsheet it calls Excel. Both can be produced at zero marginal cost. The two types of consumers for these products exist in roughly equal proportions in the population: authors, who are willing to pay $120 for Word and $40 for Excel, and economists, who are willing to pay $50 for Word and $150 for Excel. Suppose that Microsoft execs decide to sell Word and Excel separately. What price should Microsoft set for Word? What price should Microsoft set for Excel? a. $150 for Excel,$120 for Word b. $40 for Excel, $50 for Word c. $120 for Word, $150 for Excel d. $85 for Word, $95 for ExcelExplanation / Answer
Interestingly, option A and C are the same.
As Microsoft is decided to sell the Word and Excel separately,it is a case of segmentation. let's consider there are 100 consumers and consists 50 authors, 50 economists.
At $40 for Excel and $50 for WOrd, company is giving highest consumer surplus but giving away profit. We can assume all the consumers buying both the products in this case.
(40*100) + (50*100) = 9000
On the other hand $85 and $95, half of the people will definitely buy the products but as the price will be more than there expectation, further demand will be depend upon its utility, substitute products and competition.
So (85*50) + (95*50) = 9000
And at highest price point
(120*50) + (150*50) = 13500
So now if Microsoft wants to maximize its profit and if its is apparent that there is no close competiton for its product then it will bebetter off pricing the products at highest.
However, if the utility is still better for other people then it should price it at 85 and 95.
Because if half from other segments still decides to buy the product at higher price then
(85*75) + (95*75) = 13500
(85*90) + (95*90) = 16200
So it basically depends upon utility to the customers and competition in the market.