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MGRECON - Fall 2023 Online Assignment 4 due by Wed, 09/20, 11:59 pm
MGRECON - Fall 2023 Online Assignment 4 1. Dupont invented and patented Kevlar, a superstrength synthetic fiber. It has a number of end use applications including tire belts, bullet-resistant vests, cables, aircraft components, and so on. Dupont charged different prices to different end users and contractually prohibited resale. There are no capacity constraints. Suppose that at the profit-maximizing prices, the elasticity of demand for Kevlar (Market 1) for end use in aircraft components is 1 . 3 and for end use in tire belts (Market 2) is 5. Marginal cost for Dupont is constant at 5 per unit output. What prices did Dupont charge for each end use? A. P 1 = $31 . 45 and P 2 = $9 . 1 B. P 1 = $13 . 7 and P 2 = $8 . 26 C. P 1 = $21 . 67 and P 2 = $6 . 25 D. none of the above page 2 of 11
MGRECON - Fall 2023 Online Assignment 4 For questions 2 - 4 use the following information. You have been hired by the software company Bug-Free Solutions (BFS) to provide advice for their pricing. The company’s best selling application currently comes in 3 levels of quality: basic , medium and best . After much legwork, you have determined that BFS has three types of customers, whose willingness to pay for each quality increment is listed in the following table: MWTP Units 1 2 3 Group size Type 1 125 50 20 22 000 Type 2 100 30 5 54 000 Type 3 70 20 0 30 000 The last column indicates the number of buyers of each type. The first 3 columns indicate the willingness to pay for each quality increment . For example, each buyer of type 2 is willing to pay a total of $100+$30+$5 = $135 for the best quality version of the application. The buyers’ types are not observable; therefore all BFS can do is offer a menu of price-quality pairs and let each buyer select one that the buyer likes best. The cost of developing the application is sunk, thus you should aim to maximize BFS’s revenue. 2. What quality levels should BFS offer, and at what prices? A. basic at $70, medium at $100 and best at $120 B. medium at $130 and best at $150 C. best only, at $195 D. basic only, at $90 page 3 of 11
MGRECON - Fall 2023 Online Assignment 4 For questions 2 - 4 use the following information. You have been hired by the software company Bug-Free Solutions (BFS) to provide advice for their pricing. The company’s best selling application currently comes in 3 levels of quality: basic , medium and best . After much legwork, you have determined that BFS has three types of customers, whose willingness to pay for each quality increment is listed in the following table: MWTP Units 1 2 3 Group size Type 1 125 50 20 22 000 Type 2 100 30 5 54 000 Type 3 70 20 0 30 000 The last column indicates the number of buyers of each type. The first 3 columns indicate the willingness to pay for each quality increment . For example, each buyer of type 2 is willing to pay a total of $100+$30+$5 = $135 for the best quality version of the application. The buyers’ types are not observable; therefore all BFS can do is offer a menu of price-quality pairs and let each buyer select one that the buyer likes best. The cost of developing the application is sunk, thus you should aim to maximize BFS’s revenue. 3. Suppose that an advertising campaign would increase the number of type 3 customers (the group with the lowest WTP) to 50 000. The sizes of the other two groups remain unchanged. If the campaign takes place, what quality levels should BFS offer, and at what prices? A. basic at $70 and best at $150 B. basic at $70, medium at $130 , and best at $150 C. medium at $130 and best at $150 D. medium at $90 and best at $110 page 4 of 11
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