Scenario 17-1

Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost.
-Refer to Scenario 17-1. How much additional profit can the restaurant earn by switching to the use of a tying strategy to price salads and steaks rather than pricing these goods separately?
A)$20
B)$12
C)$7
D)$6

Question

Scenario 17-1
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Assume that a local restaurant sells two items, salads and steaks. The restaurant's only two customers on a particular day are Mr. Carnivore and Ms. Leafygreens. Mr. Carnivore is willing to pay $20 for a steak and $7 for a salad. Ms. Leafygreens is willing to pay only $8 for a steak, but is willing to pay $12 for a salad. Assume that the restaurant can provide each of these items at zero marginal cost.
-Refer to Scenario 17-1. How much additional profit can the restaurant earn by switching to the use of a tying strategy to price salads and steaks rather than pricing these goods separately?
A)$20
B)$12
C)$7
D)$6

Quizplus · Accepted Answer

By using a tying strategy, the restaurant can bundle a salad and a steak together and charge a price that maximizes the combined willingness to pay of both customers. Mr. Carnivore values the bundle at $27 ($20 for steak + $7 for salad), and Ms. Leafygreens values it at $20 ($8 for steak + $12 for salad). The restaurant can charge $20 for the bundle, which both customers are willing to pay, resulting in a total revenue of $40. If priced separately, the maximum revenue would be $34 ($20 from Mr. Carnivore for steak and $14 from Ms. Leafygreens for salad). The additional profit from bundling is $6 ($40 - $34).

Scenario 17-1 ​

Scenario 17-1