A software company produces specialized design software that has ardent fans among businesses and households. For simplicity, say there are 100 features to the software, and the company is deciding on what features to include in the professional and home editions. Once offered, businesses and households can choose to purchase either edition.

For simplicity, assume:

• All costs are sunk (no fixed costs and no marginal costs).
• There are 100 businesses and 100 households in the whole market.

Willingness to pay by the two groups for software with 10, 20, and 100 features is given by:

Willingness to pay

Features: 10 20 100

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Businesses 1,000 2,000 10,000

Households 200 400 2,000

a. Heres one proposal:

Quality Price

Home edition: 20 features $399

Professional edition: 100 features $9,999

How many Home editions would be sold under this proposal?

**[Hint: For households, what is the consumer surplus for the home edition, and what is the consumer surplus for the professional edition? Which will they choose? Similarly, what are the consumer surpluses for businesses, and which edition will they choose?]

b. Your team has decided the home edition will have 20 features at a price of $399. What price of the professional edition would maximize profits? What would profits be?

c. Suppose instead that the home edition had 10 features at a price of $199. What price of the professional edition would maximize profits? What would profits be