Week 16

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Week 16

• Managerial Economics

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Bonus Set
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Pashigian, Chapter 12, Exercise 7
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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.
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Pashigian, Chapter 12, Exercise 8
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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
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Pashigian, Chapter 12, Exercise 10
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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
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The Damons 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 Damons
manager has learned.
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The Damons 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 Damons
manager has learned.
Methinks Damons has learned about price
Discrimination. KSU people are q uite
knowledgeable about local prices so will not pay
an ignorance tax
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Ethyls 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)
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Ethyls 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)
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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
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2
24
8
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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.
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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? .
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If the Uniform Pancake Pricing Act were law, the
demand curve would be Q 270 - 42P, Pgt3 Q 180
- 12P, Plt 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.
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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.