At a student caf, there are equal numbers of two types of customers with the following values. The caf owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate).

Students with Early Classes Students without Early Classes

Coffee 73 63

Banana 55 105

The marginal cost of coffee is 10 and the marginal cost of a banana is 40.

The caf owner is considering three pricing strategies:

1-Mixed bundling: Price bundle of coffee and a banana for 168, or just a coffee for 73.

2-Price separately: Offer coffee at 63, price a banana at 105.

3-Bundle only: Coffee and a banana for 128. Do not offer goods separately.

Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle.

For simplicity, assume there is just one student with an early class, and one student without an early class.

Price Strategy Revenue from Pricing Strategy Cost from Pricing Strategy Profit from Pricing Strategy

1-Mixed Bundling

2-Price Separately

3-Bundle Only

Price Strategy -------- yields the highest profit for the cafe owner.

A)1

B)2

C)3