Solution of

PART C ONLY

6. Bundling Adams and Yellen (1976) A rm is selling good 1 and good 2. Pat wants to purchase at most one of each object, and has valuation v1 for good 1, v2 for good 2, and v1 + v; for both. If Pat purchases good k- for pk, then Pat receives utility vi, pk (and similarly for bundles). The rm has 3 options for selling to Pat: (a) Pure Components Firm sells goods separately at price p1 and p2. Pat can choose to either 1) buy only good 1, 2) buy only good 2, 3) buy both goods, or 4) buy nothing. i. Write out Pat's utility in each option. ii. Let v; p2. Which option will Pat choose? Show why. (b) Mixed Bundling Firm sells goods 1 and 2 separately at price p1 and p2, and together as a bundle at p3 (where p3 111 and 'Ug (p2. A. Argue that Pat will not choose to purchase good 2. B. Give a condition that guarantees Pat will choose to only purchase good 1. C. Give a condition that guarantees Pat will choose to purchase the bundle. (c) Two Customers Now consider the case when there are two customers Pat and Kelly. Let vi}, vi, vi\