Exam 3: Demand Analysis and Optimal Pricing

The cross-price elasticity between two products is estimated to be 2. If the price of the first product is increased by 8%, demand for the second product will _____.

Which of the following settings approximate pure selling problems? Explain why or why not. (i) A toll bridge (ii) CD sales in a music store (iii) Selling advertising time on a commercial radio station (iv) Checking account services (v) Seats on the subway (vi) Frozen vegetables in a store (vii) Fresh fish at the end of the business day

Assume that demand for a service depends upon price and income, where the price elasticity of demand is EP = -0.6 and income elasticity is EY = 1.2. If price falls by 4% and income rises by 2%, the quantity demanded of the service will _____.

If the demand for a good is price-elastic, a cut in price will:

When a firm practices price discrimination in two market segments, the firm:

A firm will maximize profits and revenues at the same price when:

Recently, the major firms in the United States cigarette industry joined with the government in a settlement of liability claims. Under the tentative agreement, the industry would curb advertising and pay the equivalent of about $15 billion per year (for smoking-related state Medicaid expenses) in exchange for protection against smoker lawsuits. (a) Before the settlement, a leading cigarette manufacturer estimated its marginal cost at $1.00 per pack and its elasticity of demand at -2. What is its optimal price? The firm's share of the industry payment (based on its historic market share) will raise its average total cost per pack by $0.60. What effect will this have on its optimal price? (b) A marketing manager suggests that the firm should offer price discounts to the company’s long-term, older, most-loyal (addicted) customers. Do you agree? Explain carefully. (c) In the past, anti-smoking information campaigns were fairly successful in reducing smoking. What price reaction (if any) would the cigarette companies have to such programs? Explain carefully.

Assume that a profit-maximizing firm practices price discrimination in two different market segments. If the marginal cost of producing the good is the same, the price:

Seasons Four Equipment Corporation sells 200 riding lawn mowers per month at a sales price of $1,800 each. Overall, mower demand is described by the price equation: P = 2,600 - 4Q, where P is the price of a mower and Q is the quantity of mowers demanded. The firm's estimated marginal cost is $1,000 per mower. The head of marketing points out that mower demand is quite elastic at the current $1,800 price. Therefore, he recommends cutting price in order to increase revenue and profit. Compute the point price elasticity for mower. Is the marketing chief correct?

When Rita was a student, she consumed beer with her dinner. Over the years, as her income increased, she substituted beer for a glass of wine. From this information, one can imply that:

Amalgamated Popcorn, Inc. sells bags of flavored gourmet popcorn in a popular mall. As shop owner and operator, Rhea estimates the demand for flavored popcorn to be: Q = 1,200 - 800P + 2A, where A denotes advertising weekly spending (in dollars), Q is the bags of popcorn demanded and P is the price of a bag of popcorn. She is currently charging $1.50 per bag of popcorn (for which the marginal cost is $0.75) and spending $500 per week on advertising. (a) Compute the store's price elasticity and advertising elasticity. (b) Check whether the current $1.50 price is profit maximizing. If not, determine the store’s optimal quantity and output. (c) Examine if the store should consider increasing its spending on advertising.

Derek is the co-owner of a small gift shop. His colleague, Ron wants the shop to hold a sale and reduce most prices by 10% to 20%. His parents owned a convenience store, and they said that they could always count on increased traffic when they cut prices. If a 10% price cut didn't bring enough purchases, then cut by 20%, and the cash flow would cover all their needs. Is Ron's suggestion economically viable? Why or why not?

Will a profit-maximizing firm typically sell a good at a price that is in the inelastic portion of a demand curve? Explain

A firm's demand equation is given by: Q = 60 - 60P + 2Y, where Q is quantity, P is price, and Y is income. If price increases by $2 and income increases by $80, then quantity demanded will:

A company produces a hand-held global positioning system (GPS) used for hiking and sells it for $350 per unit in the United States. The same GPS unit is also sold in Europe at a price of $250 Euros (the equivalent of about $290). Several competing European producers have charged the company with dumping GPS units at unfairly low prices in Europe. What economic defense would the company's lawyer submit for the company's pricing practice?

Which of the following correctly defines second-degree price discrimination?

Carefully define the term demand function, and explain its importance to the study of managerial economics.

Which of the following is true of full-cost pricing?

Maria is a sales manager of an appliance store and she sometimes visit outlets run by competing stores. Six months ago, she noticed that rivals' prices were very close to the prices at her store. However, in the last six months, her competitors have lowered their prices to about 15 percent below the prices at her store. Nevertheless, the total unit sales at her store have increased slightly during this time period. Assuming rational buyers and no deceptive advertising, what is the rational explanation for this?

What would happen to a firm's price elasticity of demand if additional competitors enter the market and achieve significant market shares? Explain briefly.