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2. Tying and bundling are two pricing schemes that are used by a multi-product monopoly to extract consumer surplus (price discriminate). a) What are the distinguishing features of the 2 pricing methods and the product characteristics best suited to each method. (6110005) b) Tying is generally practiced by a leasing monopoly. Whom a monopoly that leasesfrents out 'smart' copiers to businesses. It has 2 types of consumers: The high demand type (h) use 1500 boxes of paper and the low demand types (1) use 400 boxes of paper over the lifetime of the lease. The rm has no way of identifying consumers. It lcnows the demand curves for copies of each type: P = 1500 mand P = 400 Q1. Assume MC of production is 0. P 11 1500 980,000 400 100 100 45, 14m 1500 cm, 300 400 9}, Currently it leases out the machines + a servicing warranty at 80,000 for a 5-year period. Nh = 10 = number of high demand consumers and N1. = 10 = number of low demand consumers. _| I J |_ The firm now decides to change its pricing policy. It now issues the following conditional warranty: 'the servicing warranty is valid only for consumers who use the specialized paper sold by Who at a price of $100 per box.' At a price of $100 per box, for a high demand consumer low demand consumer 9h, = 1400 boxes 91,: 300 boxes Consumer surplus = 980,000 = 45,000 WTP = 45,000 + 140,000 = 185,000 = 45,000 + 30,000 = 75,000 The maximum willingness to pay for the 'copier + warrang' of the low me is now 45 ,000 for a 5 -year period. Suppose the monopoly charges for the copier and pgper smately. It charges the same lease rate of 45,000 for the copier to both types. (0 Explain precisely how this pricing policy is discriminatory. Given the policy of separate charges for the 'copier + warranty' and for paper, the monopoly's total prot is now 2,600,000 with 10 consumers of each type. If the monopoly charges a price higher than 45,000 for the copier to the high demand types they will pretend to be the low types. The rm loses consumer surplus equal to 935,000 = 980,000 - 45,000 per high type. The rm can do better by resorting to a single charge for the 'c opier + warranty' and paper. (ii) Compute the prot maximizing charge for 'copier + warranty' and paper