1. Week 16 Managerial Economics

2. Bonus Set

3. Pashigian, Chapter 12, Exercise 7

4. 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.

5. Pashigian, Chapter 12, Exercise 8

6. 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

7. Pashigian, Chapter 12, Exercise 10

8. 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

9. 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.

10. Methinks Damons has learned about price Discrimination. KSU people are q uite knowledgeable about local prices so will not pay an ignorance tax

11. 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)

12. 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)

13. 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). $3 24 $2 8 CS in yellow

14. 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.

15. 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?.

16. 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.

17. 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.