Scenario 17-4
Assume that a local bank sells two services, chequing accounts and ATM card services.Mr.Leung is willing to pay $10 a month for the bank to service his chequing account and $6 a month for unlimited use of his ATM card.Ms.Gardner is willing to pay only $6 for a chequing account, but is willing to pay $10 for unlimited use of her ATM card.Assume that each customer uses only one service and that the bank can provide each of these services at zero marginal cost.
-Refer to Scenario 17-4.If the bank is unable to use tying,what is the profit-maximizing price to charge for unlimited use of an ATM card
A)$6
B)$10
C)$12
D)$20

Question

Quizplus · Accepted Answer

For profit maximization, the bank needs to set the price for each service such that it captures the maximum amount that customers are willing to pay for it. Since each customer is using only one service, the bank can charge the maximum price that each customer is willing to pay for that service.

For Mr. Leung, the bank can charge $10 for the chequing account service, as that is his maximum willingness to pay. For the ATM card service, he is willing to pay $6. However, since he is already paying $10 for the chequing account service, the bank can charge him an additional $0 for the ATM card service (since the marginal cost is zero).

For Ms. Gardner, the bank can charge $6 for the chequing account service, as that is her maximum willingness to pay. For the ATM card service, she is willing to pay $10. Therefore, the bank can charge her $10 for the ATM card service.

Thus, the bank can charge $10 for unlimited use of the ATM card service to both customers, maximizing its profits.

Scenario 17-4 Assume That a Local Bank Sells Two Services, Chequing Accounts