1.1. In the table below, we consider how Alex, Tyler, and Monique would fare under a la carte pricing and under bundling for cable TV when there are two channels: Lifetime and the Food Network.

Alex and Tyler like to watch Project Runway so they each place a higher value on Lifetime than on the Food Network. Monique is practicing to be an Iron Chef in her second life so she places a higher value on the Food Network than on Lifetime.

Price Discrimination • CHAPTER 14 • 273 Maximum Willingness to Pay for Cable TV Alex Lifetime The Food Network The Bundle 10 7

15 Tyler 15 4

19 Monique 3

9 12

a. If the channels are priced individually, the most profitable price for the cable opera tor turn out to be 10 for Lifetime and 7 for the Food Network. At these prices, who buys what channel and how much profit i there?

b. Let's just check to ee if the e price really are profit-maximizing. What would profit be if the cable company raised Lifetime to a price of 11 and Food Network to a price of 8?

c. At the profit-maximizing prices, how much total consumer surplu would there be for the three of them? (Recall that consumer surplu is just each customer's willingness to pay mi nus the amount each person actually paid.)

d. Now consider what happens under bun dling: Customers get a take-it-or-leave-it offer of both channels or nothing at all.

The profit-maximizing bundle price turn out to be 12, and at that price, Alex, Tyler, and Monique all sub cribe. How much consumer surplus i there at this price? H ow much profit? And, most important, what would profit equal if the cable company raised the price to 13 instead?