The Following Table Summarizes the Total Costs and Profits for Both Type of Customers in 2 Scenarios

Q1. Assuming there is 1 large customer and 1 small customer (1:1 ratio)

The following table summarizes the total costs and profits for both type of customers in 2 scenarios-

• Price = $6700: In this scenario, both large and small customers will buy the machine as their WTP is more than or equal to $6700 and profit = $7098.08
• Price = $25800: In this scenario, only large customers will buy the machine as only their WTP is equal to $25800 and profit = $21,625.53

[pic 1]

Total profit is more in the scenario when price $25,800. Hence, it makes sense to price the product at $25,800

Q2. The following table describes max WTP and cost per year by taking into consideration the discount rate (through pmt function in excel). The table also shows the cost per copy for each kind of customer.

[pic 2]

In order to maximize the revenue and thereby the profit, Xeroks should institute a rental policy wherein-

Yearly fixed charge = consumer surplus for small customers = max WTP – costs = $1206.63

Per copy variable charge = marginal cost per copy for small customers = $0.28

Therefore, Xeroks will make ~21% more profit through the rental model

Q3.  The leasing policy or the rental model works better as here we are able to capture the maximum value from both types of customers. The large customers are more price sensitive than the small customers. Therefore, by instituting a two-part pricing scheme with a one-time fixed charge and a variable per copy charge, that subsidizes the large customers, we are able to capture the maximum consumer surplus and make more profit.

Q4. The advantage of leasing over selling increases when the proportion of the small to large customers changes from 1:1 to 2:1. The profit from leasing is ~21% more than selling for 1:1 whereas it is ~42% for 2:1 as shown in the below table.

This happens because incase of selling, since we make more profit by selling the machine only to large customers at $25800, the increase in small customers does not affect our profits. However, in the leasing model, we are able to capture the value from the small customers as well. Therefore, the increase in small customers increase the revenue and thereby the overall profits.

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