$$\begin{array} { | l | l | l | }
\hline \text { Customer } & \begin{array} { l }
\text { Product A } \
\text { Reservation Price }
\end{array} & \begin{array} { l }
\text { Product B } \
\text { Reservation Price }
\end{array} \
\hline 1 & 1,000 & 200 \
\hline 2 & 800 & 400 \
\hline \text { Marginal Cost } & 500 & 100 \
\hline
\end{array}$$
-Use the table above. If the firm does not bundle the products, what single price should the firm charge for product B to maximize profit?
A)100
B)200
C)300
D)400

Question

$$\begin{array} { | l | l | l | } 
\hline \text { Customer } & \begin{array} { l } 
\text { Product A } \
\text { Reservation Price }
\end{array} & \begin{array} { l } 
\text { Product B } \
\text { Reservation Price }
\end{array} \
\hline 1 & 1,000 & 200 \
\hline 2 & 800 & 400 \
\hline \text { Marginal Cost } & 500 & 100 \
\hline
\end{array}$$
-Use the table above. If the firm does not bundle the products, what single price should the firm charge for product B to maximize profit?
A)100
B)200
C)300
D)400

Quizplus · Accepted Answer

If the firm does not bundle the products, it can charge different prices for the two products. To maximize profit, the firm should set the price for each product equal to the customer's reservation price for that product, if the customer's reservation price is higher than the marginal cost of producing the product.

For product A, customer 1's reservation price is 1,000, which is higher than the marginal cost of 500. Customer 2's reservation price is 800, which is also higher than the marginal cost of 500. Therefore, the firm should charge customer 1 1,000 for product A and charge customer 2 800 for product A. 
For product B, customer 1's reservation price is 200, which is higher than the marginal cost of 100. Customer 2's reservation price is 400, which is also higher than the marginal cost of 100. Therefore, the firm should charge customer 1 200 for product B and charge customer 2 400 for product B. 
Thus, the best single price the firm can charge for product B to maximize profit is 400. In this case, the firm should price product B at its reservation price of $400, since both customers would be willing to pay this price for product B alone. The firm could charge customers different prices for products A and B, but in this case it would be better to charge the same price of $400 for product B to maximize its profit from both customers. If the firm priced product B at a higher price, one or both customers might choose not to purchase it, and the firm would lose out on potential profit. If the firm priced product B at a lower price, it would be leaving potential revenue on the table since both customers are willing to pay more for it.

-Use the Table Above