1. Bundling

2. D
(0 , 0) D
pA = 1 - qA
With 2 goods, total demand can be graphed as the area in a square. pA
(1 , 1) A

3. pA = 1 - qA pB = 1 – qB DA,B (0 , 0) pB pA (1 , 1) A D
With 2 goods, total demand can be graphed as the area in a square. pB pA
(1 , 1) A

4. pA = 1 - qA pB = 1 – qB DA,B pA,B=1/2 and qA,B=1/2 (0 , 0) pB pA
We know that with market power each good will be priced so that MR = MC. Here that means that Mr = 1-2q. To simplify, let’s assume MC = 0. Then
pA,B=1/2 and
qA,B=1/2
The area with both shades represents people who buy both goods. D
(0 , 0)
DA,B pB pA
(1 , 1) A

5. Analysis q = ½ and p = ½ With basic demand p = 1 – q and MC = 0
we have a producer with market power setting
q = ½ and p = ½
Revenue (and hence profit) will be ¼ for each good. Without bundling,
total revenue and profit will thus be ½.

6. D
(0 , 0)
pA = pB
With a pure bundle, you have to buy the same amount of each good. At p = 0 everyone buys. At p just below 2 only those who really like both goods buy.
So if p = 1.5 then only those will to pay 0.75 (or more) for good A and for good B will buy. D
pA = pB = 0.75
(1 , 1) QA

7. pA = pB pA = pB = 0.5 So for the bundle pbundle = 1
(0 , 0)
pA = pB
With a pure bundle priced at p = 1 we get the consumer who is willing to pay p=1 for good A but nothing for good B at one corner, and the vertex is for that last (marginal) consumer who is willing to pay p=1 for each good.
Total revenue = ½ and so with MC=0
Total profit = ½ D
pA = pB = 0.5
So for the bundle
pbundle = 1
(1 , 1) QA

8. So...
With a pure bundle, the marginal consumer who likes both goods will pay p = 1 for each or pbundle = 2.
If we set the price of the bundle equal to 1, then we sell bundles as per the shaded triangle, which is half the square.
We thus know we can do at least as well as selling the two goods independently.
Can we do better? YES, if we drop the price at p=1 we pick up more quantity than we lose in revenue. See the following graph.

9. qA = qB = ½ x p x p Quantity NOT sold p = 𝟑 𝟐 = 0.816...
(0 , 0)
qA = qB
So p ranges over [0,2].
With the price of the bundle p < 1 you fail to sell only to those who value good A + good B by less p, or the upper right triangle.
Total quantity is thus
1 – p2/2
and total revenue is
p – p3/2
so MR =
1 – 3p2/2.
MC = MR = 0 at
p = 𝟑 𝟐 =
Quantity NOT sold
= ½ x p x p
pbundle < 1
(1 , 1) QA