$$\begin{array} { | l | l | l | }
\hline \text { Customer } & \begin{array} { l }
\text { Product A } \
\text { Reservation Price }
\end{array} & \begin{array} { l }
\text { Product B } \
\text { Reservation Price }
\end{array} \
\hline 1 & 1,000 & 200 \
\hline 2 & 800 & 400 \
\hline \text { Marginal Cost } & 500 & 100 \
\hline
\end{array}$$
-Use the table above. If the firm bundles the products, what single price should the firm charge for the bundle to maximize profit?
A)600
B)800
C)1,000
D)1,200

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 bundles the products, what single price should the firm charge for the bundle to maximize profit?
A)600
B)800
C)1,000
D)1,200

Quizplus · Accepted Answer

To maximize profit, the firm should set the price for the bundle equal to the sum of the reservation prices of the two products for the customer with the lowest willingness-to-pay for both products (in this case, customer 1). 
So, the optimal bundled price is: 
$1,000 + 200 = $1,200 
The total cost for the firm to produce both products is $500 + $100 = $600. 
Thus, the profit per customer from the bundle is $1,200 - $600 = $600. 
This is the highest profit the firm can earn from any individual customer, since offering the products separately would yield lower profits. The firm should bundle the products if the total reservation price for the bundle is greater than the sum of the reservation prices for the individual products. 
For customer 1, the total reservation price for the bundle is $1,200 (the sum of the reservation prices for products A and B), which is greater than the reservation price for product A of $1,000. 
For customer 2, the total reservation price for the bundle is $1,200 (the sum of the reservation prices for products A and B), which is greater than the reservation price for product B of $400. 
Thus, bundling is profitable for both customers. 
The firm's profit maximizing price is equal to the marginal cost of providing the bundle to both customers, which is $600 per customer. Thus, the firm should charge $1,200 in total for both products A and B.

-Use the Table Above