Suppose that the typical buyer of a packaging machine has a straight-line individual demand curve for packaging materials. At a price of $5 per kilogram of materials, she would buy zero, while at a price of $1 per kilogram, she would buy 100,000 kg per year. The buyer plans to use the machine for one year. Production costs $150,000 for the machine and $1 per kilogram of materials.

(a) On a figure with price per kilogram of materials on the vertical axis and quantity per year on the horizontal axis, draw the demand curve.

(b) Suppose that the manufacturer sells the machine bundled with 100,000 kg of material. What is the maximum that the manufacturer can charge for the bundle? What would be the manufacturer’s profit per customer?

(c) Suppose that the manufacturer sets a two-part pricing policy, comprising a price for the machine and a price of $2 per kilogram of materials. What is the maximum price, F , that the manufacturer can charge for the machine? What would be the manufacturer’s profit per customer?

(d) Suppose that the manufacturer sets a two-part pricing policy, with price, F , for the machine and a price of $2 per kilogram of materials. After buying the machine, the customer is influenced by sunk costs and her demand curve shifts up by $1 at all levels of consumption. On the figure in (a), draw the new demand curve. What would be the manufacturer’s profit?