1. (25 points) Suppose, your firm produces two products, the demands for which are independent. You face four consumers with the following reservation prices:

Consumer Good 1 Good 2

A 25 100

B 40 90

C 80 60

D 100 20

a). (5 points + 2 points + 1 point) Suppose that the production of each good entails a marginal cost of $30. Consider two pricing strategies:

i) selling the goods separately;

ii) pure bundling. For each strategy, determine the optimal prices to be charged and the resulting profits. Which strategy would be best?

b). (2 points + 8 points) Do you think a mixed bundling strategy can generate more profit for this firm? Why or why not? Calculate the amount of profits the firm is generating under the following mixed bundling strategies. Evaluate each strategy to identify the reason why one strategy is generating more profit than the other. (hint: calculate consumer surplus at each price for each consumer and check if inclusion or exclusion principals are violated.)

i) Bundle price, = 130; Price of good 1, 1 = 100; Price of good 2, 2 = 100

ii) Bundle price, = 140; Price of good 1, 1 = 100; Price of good 2, 2 = 100

c). (5 points + 2 points) No suppose, marginal cost of producing good 1 is $45 and the marginal cost of producing good 2 is $25. Does this information change your answers in part a? How? With this cost structure does pure bundling generate a higher profit than separate pricing? Why or why not?