Here's a simple numerical example that is meant to teach you how to solve bundling problems and also illustrate some of the problems associated with the textbooks bundling program the university bookstore is currently running and that I spoke to you about a bit earlier in the semester. I will ask you to solve this as a purely bundling problem and find the optimal prices that the firm will choose, but then I also want to take this one step further and ask you to calculate the efficiency implications of this on the market. That means you will be asked to calculate the resulting consumer surplus and total market surplus that will result under each pricing regime.

So let's assume that 7 students are looking to purchase Economics and Accounting textbooks. Furthermore, let's assume they all have different valuations for these textbooks with some students willing to pay much more for Economics textbooks than for Accounting textbooks and vice-versa. There are a multitude of reasons why that might happen - for instance students who major in a particular discipline are willing to pay more for the textbooks directly related to their majors. So let's assume the following valuations:

	Accounting Textbooks	Economics Textbooks
Student 1	120	10
Student 2	100	30
Student 3	90	70
Student 4	80	80
Student 5	60	90
Student 6	40	100
Student 7	10	120

Let's also assume that an Accounting textbook costs the bookstore $20 to procure and an Economics textbook costs $10.

Assuming the bookstore is trying to maximize its profits, answer the following questions.

Questions:

1. Assuming the bookstore is using individual pricing, what will be the prices chosen for Accounting and Economics textbooks, respectively? What will be the resulting profit, student surplus, and total surplus (profit+student surplus)?
2. Assuming a pure bundling strategy, what will be the price of the bundle and the resulting profit, student surplus, and total surplus?
3. Assuming a mixes bundling strategy, what will be the price of the bundle, the price of the individually priced textbooks and the resulting profit, student surplus, and total surplus?
4. Contrast and compare between the 3 pricing options. Which option is the best for the bookstore, which option is the best for students, and which option is the best for the market overall?
5. What would actually be the social optimum pricing (that would maximize the total surplus)?