Suppose two types of consumers buy suits.Consumers of type A will pay $100 for a coat and $50 for pants.Consumers of type B will pay $75 for a coat and $75 for pants.The firm selling suits faces no competition and has a marginal cost of zero.The optimal commodity bundling strategy is:
A) Charge $150 for a suit.
B) Charge $75 for a suit.
C) Charge $100 for a suit.
D) Charge $125 for a suit.

Question

Quizplus · Accepted Answer

The optimal commodity bundling strategy is to charge $150 for a suit. This is because consumers of type A are willing to pay a total of $150 ($100 for coat and $50 for pants) and consumers of type B are willing to pay a total of $150 ($75 for coat and $75 for pants) for the two items separately. By bundling the two items together for a price of $150, the firm captures the full value that both types of consumers are willing to pay. If the firm were to charge a lower price for the suit, consumers of type A would buy the suit and the pants separately ($150 total) rather than the bundled suit for $100, resulting in lost revenue for the firm. Similarly, consumers of type B would buy the coat and pants separately ($150 total) rather than the bundled suit for $75, also resulting in lost revenue for the firm.

Suppose Two Types of Consumers Buy Suits