Oscar has owned a Ford automobile dealership for over 25 years. Since he has been heavily involved in the sales of cars, Oscar believes that there are 3 different types of customers with the following willingness to pays: Sunroof Navigation System Customer A $3,000 $1,200 Customer B $1,800 $600 Customer C $150 $1,800 Although not realistic, assume that incremental costs are $0. As the owner of the dealerships, Oscar has the final say on pricing for each customer. Suppose that Oscar knows the willingness to pay of Customer A, B and C as soon as he meets them. What price should Oscar charge to each customer to maximize profits? What is the total amount of profits for the 3 customers and what is the total amount of consumer surplus for the 3 customers? Show your calculations. More realistically, Oscar would not know the willingness to pay for each customer. So, Oscar decides to sell the Sunroof by itself for a price of $1,500 and the Navigation System by itself for $1,500. He also decides to run a special “bundle” of the sunroof and navigation system for $2,250. Each of the 3 customers can either buy the special bundle or the individual options – they cannot buy both. a. Will Customer A, B and C buy the sunroof, the navigation system or the special bundle? Explain why. b. What is the total amount of profits for the 3 customers and what is the total amount of consumer surplus for the 3 customers? Show your calculations.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Please answer only a. & b.

Oscar has owned a Ford automobile dealership for over 25 years. Since he has been heavily involved in the sales of cars, Oscar believes that there are 3 different types of customers with the following willingness to pays:

Sunroof Navigation System

Customer A $3,000 $1,200

Customer B $1,800 $600

Customer C $150 $1,800

Although not realistic, assume that incremental costs are $0.

As the owner of the dealerships, Oscar has the final say on pricing for each customer. Suppose that Oscar knows the willingness to pay of Customer A, B and C as soon as he meets them. What price should Oscar charge to each customer to maximize profits? What is the total amount of profits for the 3 customers and what is the total amount of consumer surplus for the 3 customers? Show your calculations.
More realistically, Oscar would not know the willingness to pay for each customer. So, Oscar decides to sell the Sunroof by itself for a price of $1,500 and the Navigation System by itself for $1,500. He also decides to run a special “bundle” of the sunroof and navigation system for $2,250.

Each of the 3 customers can either buy the special bundle or the individual options – they cannot buy both.

a. Will Customer A, B and C buy the sunroof, the navigation system or the special bundle? Explain why.

b. What is the total amount of profits for the 3 customers and what is the total amount of consumer surplus for the 3 customers? Show your calculations.

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