Question

Use the following information to answer question: Suppose that ABC Publishing sells a digital version of an economics textbook (an ebook) and an accompanying study guide. Bob is willing to pay $120 for the text and $25 for the study guide. Mary is willing to spend $100 for the text and $35 for the study guide. Suppose both the book and study guide have a zero marginal cost of production.

If ABC Publishing engages in tying, its best strategy is to charge a combined price of
a. $125.
b. $120.
c. $140.
d. $135.
e. $130.

Answer 1

ABC Publishing should use a tying strategy to charge a combined price of $135 for the ebook and study guide, as it is the highest price that both consumers, Bob and Mary, are willing to pay. Therefore correct option is D

Step-by-step explanation:

When ABC Publishing engages in tying, which is a form of monopolistic pricing strategy where they sell two products together, their best strategy is to maximize revenue.

Since Bob is willing to pay $120 for the text and $25 for the study guide, we have a total willingness to pay of $145. Mary is willing to pay $100 for the text and $35 for the study guide, with a total of $135.

To maximize revenue, ABC Publishing should charge a combined price that is equal to the maximum price that at least one consumer is willing to pay without excluding all consumers.

In this case, the best price strategy would be at $135, which both Bob and Mary are willing to pay for the combination of the textbook and the study guide.