Transcript Week 2 - Personal.kent.edu

Week 16
Managerial Economics
Bonus Set
Pashigian, Chapter
12, Exercise 7
There appear to be two types of customers. The first
type appears to be unaffected by competition, while
the second type appears to be sensitive to price,
holding competition constant. Thus the second group
gets a discount when the firm does not have a
superior product, reflecting the higher price elasticity
of demand. When the product is superior, as it is in
years when there is an upgrade, then the supplier can
hit both groups with a high price. The policy seems to
be one of "when we have no quality advantage, give
a break to the group that is price sensitive, but when
we have a quality advantage, take advantage of the
lower price elasticity of demand and price
accordingly.
Pashigian, Chapter
12, Exercise 8
The best pricing policy is as follows: Charge $600 for Saturday
departures. Charge $799 for Friday departures. Charge a price
high enough to discourage anyone from traveling on Sunday.
Tourist travelers will then choose to travel on Saturday. They get
a better price on that day than Friday. That is the most you can
charge these travelers. You want business travelers to leave on
Friday, but they have the option of leaving on Saturday. If they
leave on Saturday, given your $600 price, they will get
consumer surplus of $400. Thus, the highest price you can
charge on Friday and get them to pass up the bargain fare is
one that leaves them with a $401 surplus, and that turns out to
be $799. As to Sunday, your minimum price must be $450.
To be precise, you might charge a penny less than $600 to
leave some consumer surplus
Pashigian, Chapter
12, Exercise 10
I agree. If the monopolist is charging a
"take it or leave it" price for a bundle, he
should be able to capture the entire
consumer surplus. If he has left them with
some surplus, he hasn't practiced profit
maximization. Of course, this assumes the
customers cannot engage in arbitrage
The Damon’s restaurant in Kent offers
25% off any lunch tab Monday
through Saturday to any Kent Faculty
Staff or Student with an ID.. Damons
explains that this offer is made to show
appreciation to the university
community for its support throughout
the year. Explain what important
economics lesson you think the
Damon’s manager has learned.
The Damon’s restaurant in Kent offers
25% off any lunch tab Monday
through Saturday to any Kent Faculty
Staff
or Student
with
ID.. Damons
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Damons
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about
explains
that this offer is
made
to show
price Discrimination.
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an ignorance
tax
community
fornot
itspay
support
throughout
the year. Explain what important
economics lesson you think the
Damon’s manager has learned.
Ethyl’s Bar and Grill has two types of customers.
Their demand functions for drinks are
Q = 12- 3p
and
Q = 24-8p.
While Ethyl cannot tell the two types apart, she
can prevent arbitrage. Devise a pricing system
(You may assume the marginal cost of a drink is
zero)
Ethyl’s Bar and Grill has two types of customers.
Their demand functions for drinks are
Q = 12- 3p
and
Q = 24-8p.
While Ethyl cannot tell the two types apart, she
can prevent arbitrage. Devise a pricing system
(You may assume the marginal cost of a drink is
zero)
I suggest the following. Let drinks go for $2 each.
Then the Reds will purchase 6 each for $12. This is
the price a Ethyl would charge if these were her only
customers and if she charged by the drink. (This is a
long way of saying this is the monopoly price.).
If the Blues purchased drinks at $2 each, their
consumer surplus would be $4. (See the graph).
CS in
yellow
$3
$2
8
24
If the Blues got drinks for free,
their consumer surplus would be
$36. So if Ethyl offered an "all
you can drink" card for $31.99,
they would purchase it and get
consumer surplus of $4.01.
Fred has pancake houses in Seattle and
Youngstown, Ohio. The demand functions for
pancakes are
Seattle Q = 180-12P
Youngstown Q = 90 – 30 P
You may assume that marginal cost is zero.
What price should Fred charge if the Uniform
Pancake Pricing Act (UPPA) becomes law (That
is, Fred is constrained to charge the same price at
both restaurants).
What prices should Fred charge otherwise? .
If the Uniform Pancake Pricing Act were law, the
demand curve would be
Q = 270 - 42P, P>3
Q = 180 - 12P, P<= 3
(When the price drops to $3, demand in
Youngstown drops to zero). The usual rule
applies: set MR = MC, equal to zero in this
instance. The complication here is that the MR
curve is not a straight line, but two straight lines
corresponding to different segments of the
demand curve.
The right solution is to charge $7.50 for
pancakes, selling 90 in Seattle and Shutting down
the Youngstown market. I reached this
conclusion by graphing the MR curve.
If Fred can charge different prices in the two
cities, charge $7.50 in Seattle and $1.50 in
Youngstown.