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Media Corp. has determined that its customer base is divided into two groups: sports fans and news junkies. There are one million sports fans and one million news junkies. The sports fans value the premium sports channel at $40 per month while its news junky customers value the sports channel at $25 a month. However, news junkies value the premium news channel at $40 per month while sports fans value it at $10. Assume that the marginal cost of providing either or both channels to another customer is $0.
a. If Media Corp. prices each channel separately and at the same price to all customers, what price will it set for each channel and what will be its average total revenues per viewer?
b. If instead Media Corp offers only a bundled package with the option of buying neither or both the sports and news channels. What price will Media Corp. set for the bundle? What will be its average total revenue per viewer?
c. What is the effect on Media Corp.'s profits from bundling?
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