A local bank sells two services, cheque accounts and ATM card services. Mr Donethat is willing to pay $8 a month for the bank to service his cheque account and $2 a month for unlimited use of his ATM card. Ms Beenthere is willing to pay only $5 for a cheque account but is willing to pay $9 for unlimited use of her ATM card. To keep this example simple, assume that the bank can provide each of these services at zero marginal cost.
-According to the information provided, if the bank is unable to use tying, what is the profit-maximising price to charge for unlimited use of an ATM card?

Question

Quizplus · Accepted Answer

To maximize profits, the bank should price discriminate and charge different prices to each customer based on their willingness to pay. Mr Donethat is willing to pay $2 for ATM card services, while Ms Beenthere is willing to pay $9. The bank should charge Ms Beenthere $9 for ATM card services, as this is the highest price she is willing to pay. Since Mr Donethat is willing to pay less, charging him $9 would result in him not purchasing the service at all, and the bank would lose out on his $2 monthly payment for the ATM card. Therefore, the bank should charge Mr Donethat the full $2 that he is willing to pay, and charge Ms Beenthere $9 for ATM card services. This results in a profit-maximizing pricing strategy of $2 for ATM card services.

A Local Bank Sells Two Services, Cheque Accounts and ATM