# B assuming that it costs the restaurant only 010 to

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Chapter 7 / Exercise 4
Systems Architecture
Burd
Expert Verified
b.Assuming that it costs the restaurant only \$0.10 to produce a cheeseburger, \$0.15 to produce one order of French fries, and \$0.05 to produce a soft drink, what will be their total profits if they price separately using the prices determined above?c.Suppose the restaurant is trying to decide whether or not to offer a value meal, which would include a cheeseburger, French fries, and a soft drink. What price should they charge for this value meal? Would profits be higher or lower than if the restaurant sets prices individually? Explain.Ans: a. They should charge \$1.00 for a cheeseburger, \$1.25 for an order of French fries, and \$1.20 for a soft drink.b. Total Revenue = 2 ×\$1.00 + 1 ×1.25 + 1 ×1.20 = \$4.45Total Cost = 2 ×\$0.10 + 1 ×\$0.15 + 1 ×\$0.05 = \$0.40Total Profits = \$4.45 \$0.40 = \$4.05c. James' maximum willingness to pay for all three items is \$3.20, but Chris' willingness to pay for all three items is only \$2.75. Since the restaurant is better off selling two meals at \$2.75 than one at \$3.20, they should charge a price of \$2.75 for the value meal. At this price they would have total revenues of \$5.50 and total costs of \$0.60 = (2 ×\$0.10 + 2 ×\$0.15 + 2 ×\$0.05). Profits from the value meal would be \$5.50 \$0.60 = \$4.90. Profits are higher with the value meal. Since James and Chris have different willingness to pay for the individual items, but a
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Chapter 7 / Exercise 4
Systems Architecture
Burd
Expert Verified
similar willingness to pay for the bundle, the firm is able to extract the consumer surplus by price discriminating.Difficulty: ChallengingSkill Descriptor: Critical-ThinkingTopic: Tying and Bundling278. Table: Cable TVSteveJimSandyHBO\$30\$20\$25ESPN\$50\$20\$15HGTV\$5\$5\$40The table represents the maximum willingness to pay (per month) across three consumers for different TV channels. The marginal cost of providing each of these channels to an additional consumer approximates zero. If the cable television company does not bundle stations, what price should they charge per station to maximize profits across these three consumers? Could the company increase profits by bundling these three stations together? How much would profits increase or decrease by if the company bundled the stations?Ans: If the company did not bundle stations, they should charge \$20 for HBO (profit =\$60), \$50for ESPN (profit =\$50), and \$40 for HGTV (profit =\$40). By bundling all three stations together into one package, the company could increase their profits by \$10 if they charge a bundled price of \$80 for all three stations (profit =\$160).Difficulty: ChallengingSkill Descriptor: Critical-ThinkingTopic: Tying and Bundling