EyeSolutions is the proud creator of eyeTab

EyeSolutions is the proud creator of eyeTab, a leading eReader. Market research shows that there are two types of consumers: 2 million avid readers, whose willingness to pay is $350; and 3 million occasional readers, whose willingness to pay is $200. Currently EyeSolutions is considering the launch of the minieyeTab, a smaller, stripped- down version of the eyeTab. Studies suggest that avid readers would only be willing to pay $150 for the smaller reader, whereas occasional readers would not pay more than $120. The production cost of a minieyeTab is $80, whereas that of a regular eyeTab is $140.

(a) Determine the EyeSolutions optimal pricing policy.

At a product development brainstorming, one technician suggested including a high-resolut- ion camera in the minieyeTab, since “it’s the same production cost as the camera we are currently planning to include in the mineyeTab.” A focus group suggests that the high resolution camera would increase willingness to pay by $5 (occasional readers) and $15 (avid readers).

(b) Is is worthwhile for EyeSolution to include the high-resolution camera in the mineyeTab? Justify your answer providing as much economic intuition as possible.

4. Calling plans. WeRCell offers wireless phone service. Market research has established that there are two types of customers, in equal number: light users (Type 1) and heavy users (Type 2). Type 1 users are willing to pay calls for at most $1 per minute, and if price per call were zero they would make 100 minutes of calls per month. Type 2 are willing to pay calls for at most $1.4, and if price per call were zero they would make 140 minutes of calls. Suppose moreover that the marginal cost of placing calls is zero.

What is the optimal menu of call plans from the seller’s point of view? (That is, the one that maximizes seller revenue and profit?) Hint: Following the analysis in the text, suppose that the seller sets p2 = MC = 0 and f1 = CS 1(p1), where CS is consumer surplus.