Your hot new startup has just created a software package that will track a firm's employees day and night to determine how hard they are working (sounds creepy to me). As the marketing director, you must decide on the pricing of the new software. Your research has given you estimates for the potential demand for EmployeeTracker. You believe that there are essentially two market segments of the same size, Tough Bosses (one million) and Cheap Bosses (two million). Tough Bosses would be willing to pay up to $8,000 and students up to $2,000 for the full version of the software. A substantially scaled-down version of the software would be worth $1,000 to Cheap Bosses and is worthless to Tough Bosses. It is equally costly to sell any version. In fact, other than the costs for initial development, production costs are zero.

(a) What are the optimal prices that you would charge for each version of the software?

(b) Suppose that, instead of the scaled-down version, your startup could sells a different intermediate version that is valued at $4,000 by Tough Bosses and $1,500 by Cheap Bosses.?What are the optimal prices in this new situation for each version of the software? Is the firm better off by selling this new intermediate version instead of the original scaled-down version?