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| There are seven consumers, each of whom is hungry for exactly one Butterfinger. The consumers’ maximum willingness to pay is given in the table on the right: Consumer (age, gender) Maximum Willingness to Pay Marge (34, female)…………………………….. $2 Homer (38, male) .……………………………. 4 Lisa (6, female) ………………………………. 5 Maggie (2, female) …………………………… 6 Ned (46, male) ………………………………… 1 Krusty (55, male) …………………………….. 3 Bart (9, male) ………………………………… 7 a. Given that each consumer wants one and only one Butterfinger, draw the demand curve for Butterfingers. b. If Butterfingers are priced at $7, only one will be sold. Who buys that Butterfinger? Label the point at $7 on the demand curve with the name of that buyer. c. If Butterfingers are priced at $6, a second buyer will be priced into the market. Who is that buyer? Label the point at $6 on the demand curve with the name of that buyer. d. Continue to label each point on the demand curve with the name of the buyer represented by that point. e. Suppose that you are a monopoly seller of Butterfingers, which you can produce at a constant marginal and average total cost of $2. Suppose you charge every customer the same price for Butterfingers. What price should you set to maximize your profit? How many Butterfingers will you sell? Calculate your profit. Calculate the consumer surplus received by the buyers. Calculate the deadweight loss. f. Suppose that every customer who comes into your Butterfinger store has their maximum willingness to pay displayed in neon on their foreheads. You decide to use this information to increase your profit by practicing first-degree price discrimination. How many Butterfingers will you sell? Calculate your profit. Calculate the consumer surplus received by the buyers. Calculate the deadweight loss. g. Where does the consumer surplus go when you begin price discriminating? h. What happens to the deadweight loss? |
There are seven consumers, each of whom is hungry for
SmacFone is a major provider of pay-by-the-minute, no contract cellphones
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| a. Determine the profit-maximizing price and quantity that SmacFone would like to charge each type of consumer, and show it on the appropriate graph. Then, determine the potential profit that SmacFone could generate from each segment. Because SmacFone cannot tell whether a new customer is an ordinary person or a drug dealer, it decides to use second-degree price discrimination to separate consumers. SmacFone sets a Plan A price of 15 cents per minute, but offers a special Plan B price of 10 cents per minute if a customer purchases 300 or more minutes. b. Determine how much consumer surplus ordinary consumers would receive under Plans A and B. Which plan should ordinary consumers choose if they are trying to maximize their surplus? c. Determine how much consumer surplus drug dealers would receive under Plans A and B. Which plan should drug dealers choose if they are trying to maximize their surplus? d. Is the plan SmacFone derived incentive compatible? (In other words, will the plan successfully direct drug dealers to Plan A and ordinary consumers to Plan B?) How much profit will SmacFone generate with this set of plans? e. SmacFone is considering making some adjustments to their plans. One option is to change Plan B to 11 cents per minute with a 240-minute minimum. Determine whether the new plan selection is incentive-compatible. Why doesn’t SmacFone simply raise the price to 11 cents without altering the 300-minute minimum? How much profit will the new set of plans generate for SmacFone? f. Another option that SmacFone is considering is dropping the price of its ordinary service to 14 cents per minute. Determine whether the new plan selection is incentive compatible. How much profit will the new set of plans generate for SmacFone? g. Why does lowering the price of ordinary service work better at creating an incentive-compatible set of calling plans than raising the price of the large-quantity plan? |
Elaine makes delicious cupcakes that she mails to customers across
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| a. If Elaine is an ordinary monopolist, what price should she charge for cupcakes? How many will each customer order? How much profit will Elaine earn? How much consumer surplus will the buyer get? b. Suppose that Elaine decides to offer a quantity discount according to the following terms: The first 10 cupcakes can be bought for $1.50 each; any cupcake over 10 will be offered at a discounted price. What discount price will maximize Elaine’s profit from this pricing scheme? c. How many cupcakes will customers order at full price? How many at the discounted price? d. What will Elaine’s profit be? How does this scheme compare to the profit she earned as an ordinary monopolist? e. Suppose that Elaine gets super-greedy and decides to implement a three-tiered pricing system. What three prices should she choose to maximize her profit? At what quantities will the price points change? What will her profit be? f. Suppose Elaine decides to charge $2.40 for the first cupcake, $2.30 for the second, and so on. How many cupcakes will she sell, and what will her profit be? g. What happens to consumer surplus as Elaine adds more price points? Where does it go? |
Three consumers, John, Kate, and Lester, are in the market
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| a. If you are a local farmer who can produce dates and eggs for free, what is the optimal price for dates and eggs if you price them individually? How much profit will you generate? b. If you bundle dates and eggs together, what price should you set for a bundle containing one package of dates and a dozen eggs? How much profit will you generate? c. Is there any advantage to mixed bundling in this case? Why or why not? d. Suppose that the cost of producing dates and eggs rises to $1.00 per package and $1.00 per dozen, respectively. Now is there any advantage to mixed bundling? Why or why not? Explain your answer with a numerical illustration. e. What accounts for the change in optimal strategy when costs change? |
Microsoft sells two types of office software, a word processor
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| Microsoft sells two types of office software, a word processor it calls Word, and a spreadsheet it calls Excel. Both can be produced at zero marginal cost. There are two types of consumers for these products, who exist in roughly equal proportions in the population: authors, who are willing to pay $120 for Word and $40 for Excel, and economists, who are willing to pay $50 for Word and $150 for Excel. a. Ideally, Microsoft would like to charge authors more for Word and economists more for Excel. Why would it be difficult for Microsoft to do this? b. Suppose that Microsoft execs decide to sell Word and Excel separately. What price should Microsoft set for Word? (Hint: Is it better to sell only to authors, or to try to sell to both authors and economists?) What price should Microsoft set for Excel? What will Microsoft’s profit be from a representative group of one author and one economist? c. Suppose that Microsoft decides to bundle together Word and Excel in a package called Office, and not offer them individually. What price should Microsoft set for the package? Why? How much profit will Microsoft generate from a representative group of one author and one economist? d. Does bundling allow Microsoft to generate higher profit than selling Word and Excel separately? |
London’s Market Bar has a unique pricing system where a
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| London’s Market Bar has a unique pricing system where a computer sets the price based on demand. When demand picks up, the computer begins to gradually reduce prices. This pricing strategy is puzzling to those who have studied supply and demand. Celene Berman, the assistant manager, says a group of “young city-boy types” recently kept asking why prices “were going the wrong way around.” Explain, using your knowledge of block pricing, why the owner’s strategy of reducing prices as sales increase might actually lead to increased profit for the bar. |
Rockway & Daughters Piano Co. wishes to sell a piano
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| Rockway & Daughters Piano Co. wishes to sell a piano to everyone. But some consumers are budgetconscious, and others are not, and unfortunately, Rockway cannot tell which is which. So, Rockway produces a premium line of pianos that it markets under the Rockway name, and a similar line of pianos that it markets under the Dundee name. While the cost of producing these pianos is quite similar, all consumers agree that Rockway pianos are of higher quality than Dundee pianos, and would be willing to pay more for a Rockway. Budget-conscious consumers feel that Dundee pianos are worth $6,000, and Rockways are worth $8,000. Performance artists believe that Dundee pianos are worth $7,000 and Rockways are worth $12,000. a. Suppose Rockway & Daughters prices its Dundee pianos at $5,000 and its Rockway pianos at $10,500. Are these prices incentive compatible-that is, will more price-conscious consumers purchase the Dundee line, while more performance-oriented players choose the Rockway? Explain. b. How much must Rockway & Daughters reduce the price of its Rockway line in order to achieve incentive compatibility? c. Suppose instead that Rockway & Daughters tries to achieve incentive compatibility by raising the price of its Dundee line. Can it do so? And if so, how? |
Many textbooks are now available in two versions, a high-priced
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| Many textbooks are now available in two versions, a high-priced “domestic” version and a low-priced “international” version. Each version generally contains exactly the same text, but slightly altered homework problems. a. Why would a textbook publisher go to the trouble to produce two versions of the same text? b. Discuss whether the publisher’s strategy would be more effective if it made the alterations secret, or if it announced them boldly. c. The production of international versions of textbooks was concurrent with the explosion of the Internet. Explain why this is likely to be more than just a coincidence. |
A local golf course’s hired-gun econometrician has determined that there
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| A local golf course’s hired-gun econometrician has determined that there are two types of golfers, frequent and infrequent. Frequent golfers’ annual demand for rounds of golf is given by Qf = 24 – 0.3P, where P is the price of a round of golf. In contrast, infrequent golfers’ annual demand for rounds of golf is given by Qi = 10 – 0.1P. The marginal and average total cost of providing a round of golf is $20. a. If the golf course could tell a frequent golfer from an infrequent golfer, what price would it charge each type? How many times would each type golf? How much profit would the golf course generate? The greens manager has difficulty telling frequent from infrequent golfers, so she decides to use second-degree price discrimination (quantity discounts) to make different types of golfers self-select into the most profitable pricing scheme. The course sets a price for individual rounds of golf, but also offers a quantity discount for members willing to buy a rather large quantity of rounds in advance. The course’s owners hope that frequent golfers will self-select into the discounted plan, and that infrequent golfers will choose to buy individual rounds. b. What price should the golf course set for individual rounds of golf? Why? c. If the course wishes to maximize profit, what price and minimum quantity should it establish for the discounted plan? d. Which plan will generate the greatest consumer surplus for frequent golfers, the individual-round plan or the discount plan? Illustrate your answer by showing and measuring the areas of surplus on frequent golfers’ inverse demand curves. e. Which plan will generate the greatest consumer surplus for infrequent golfers, the individual-round plan or the discount plan? Illustrate your answer by showing the areas of surplus on infrequent golfers’ inverse demand curves. f. Based on your answers to (d) and (e), will the plan be successful in making golfers self-select into the most profitable plan for the golf course? g. Suppose that each type of golfer came to the course with the word “frequent” or “infrequent” tattooed on his or her forehead. Is this information of any value to the golf course owner? (In other words, can the owner earn any more profits by segmenting than it did with its quantity discount plan?) |
Owners of a Florida restaurant estimate that the elasticity of
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| Owners of a Florida restaurant estimate that the elasticity of demand for meals is -1.5 for senior citizens and -1.33 for everyone else. a. Given this information, how big (in percentage terms) should the senior citizen discount be? b. Suppose that the restaurant owners discover that seniors tend to demand more attention from their waiters and send back more food as unsatisfactory, to the extent that the marginal cost of serving a senior is twice as high as serving an adult. Accounting for these costs, how large should the senior citizen discount be? (Hint: Refer back to the example in the text, but don’t cancel out marginal costs!) c. Were your results in part (b) surprising? Explain them, intuitively. |
