You are a produce grocer who sells two products: apples and bananas (you sell them in bushels, but we’ll just consider a bushel to be one unit of fruit). Each costs you $1 per bushel wholesale, which is your only cost. You can prevent resale among your customers, of which there are three, each with unit inelastic demand. Consumer 1 has a willingness to pay of $2 per apple (bushel) and $8 per banana (bushel). For Consumer 2, the willingness to pay is $4 for apples and $6 for bananas. Consumer

You are a produce grocer who sells two products: apples and bananas (you sell them in bushels, but we’ll just consider a bushel to be one unit of fruit). Each costs you $1 per bushel wholesale, which is your only cost. You can prevent resale among your customers, of which there are three, each with unit inelastic demand. Consumer 1 has a willingness to pay of $2 per apple (bushel) and $8 per banana (bushel). For Consumer 2, the willingness to pay is $4 for apples and $6 for bananas. Consumer 3 would pay up to $9 for apples but only $1 for bananas.

A. Suppose you price apples and bananas separately. What is the profit-maximizing price for each?

B. What is the profit-maximizing price if you sell the two fruit as a pure bundle?

C. What leads to higher profits – selling separately or offering a pure bundle? Explain how this answer relates to the correlation in consumers’ willingness to pay across apples and bananas.

D. Can you do better by mixed bundling? Explain why or why not?

E. Does your answer to part (d) change if your production cost is $3 per unit instead?