Question

The only nail salon in town offers two services: manicures and pedicures. The salon has two types of customers: one type of customer generally wears sandals, and one type of customer generally wears boots. Sandal wearers are willing to pay 32 for a pedicure and8 for a manicure. Boot wearers are willing to pay 24 for a pedicure and24 for a manicure. Assume that the salon can provide each of these services at zero marginal cost per service. There are equal numbers of customers of each type. Suppose the salon is able to use tying (bundling) to price manicures and pedicures, though it may still also sell each service individually. There are two bundle prices (and corresponding set of prices for each service individually) that maximize profits for the salon. These two sets of prices are: Pricing Scheme 1 (High Bundle Price) Pricing Scheme 2 (Low Bundle Price) What is the price of a pedicure in Pricing Scheme 1? What is the price of a manicure in Pricing Scheme 1? What is the price of a pedicure in Pricing Scheme 2? What is the price of a manicure in Pricing Scheme 2?

1) $32, $8, $24, $24
2) $32, $8, $24, $24
3) $24, $24, $32, $8
4) $24, $24, $32, $8

Answer 1

In Pricing Scheme 1, the pedicure price is $32, and the manicure price is $24. In Pricing Scheme 2, both pedicure and manicure prices are $24. These schemes consider the value placed by different customer types on each service to maximize profits.

Step-by-step explanation:

The question pertains to determining the optimal pricing strategy for a nail salon that offers both manicures and pedicures, with two distinct customer segments—those that wear sandals and those that wear boots. To maximize profits with zero marginal cost, the salon considers two pricing schemes with bundle pricing and individual service pricing. Under Pricing Scheme 1 (High Bundle Price), customers are likely to be charged the highest price that each type of customer is willing to pay for at least one service, which would be $32 for pedicures for sandal wearers and $24 for manicures for boot wearers.

Meanwhile, Pricing Scheme 2 (Low Bundle Price) would be set at the lower price points that each customer segment is willing to pay for both services. This equates to $24 for pedicures and $24 for manicures. It's important to establish the right combination in order to balance revenue generation with customer satisfaction and demand.