Pricing with market power review questions

b. 
Now suppose that the production of each good entails a marginal cost of $30. How 
does this information change your answers to (a)? Why is the optimal strategy now 
different? 
With marginal cost of $30, the optimal prices and profits are: 
Price 1 
Price 2 
Bundled 
Price 
Profit 
Sell Separately 
$80.00 
$80.00 
— 
$200.00 
Pure Bundling 
— 
— 
$120.00 
$240.00 
Mixed Bundling 
$94.95 
$94.95 
$120.00 
$249.90 
Mixed bundling is the best strategy. Since the marginal cost is above the reservation 
price of consumer’s A and D, the firm can benefit by using mixed bundling to encourage 
them to only buy the one good. 

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Chapter 11: Pricing with Market Power 
181
16. A cable TV company offers, in addition to its basic service, two products: a Sports 
Channel (Product 1) and a Movie Channel (Product 2). Subscribers to the basic service 
can subscribe to these additional services individually at the monthly prices P
1
and P
2
, 
respectively, or they can buy the two as a bundle for the price P
B
, where P
B
< P
1
+ P
2
.
(They can also forego the additional services and simply buy the basic service.) The 
company’s marginal cost for these additional services is zero. Through market research, 
the cable company has estimated the reservation prices for these two services for a 
representative group of consumers in the company’s service area. These reservation 
prices are plotted (as x’s) in Figure 11.16, as are the prices P