1096 Words5 Pages
6-3 A bank in a medium sized Midwestern city, Firm X, currently charges $1 per transaction at it’s ATM’s. To determine whether to raise price, the bank managers experimented with a number of higher prices(in 25-cent increments) at selected ATM’s. The marginal cost of an ATM transaction is $0.50. ATM Fee USAGE $ 2.00 1000 $ 1.75 1500 $ 1.50 2000 $ 1.25 2500 $ 1.00 3000 What ATM fee should the bank charge? When you say "marginal cost", we have to assume you mean marginal for transactions over 1000 and that the cost for the first 1000 transactions is zero. That means the revenue equation is specified as : R=(P*Q)-((Q-1000)*0.5) where R=Revenue Q= Quantity of transactions P= Price per transaction In this…show more content…
In the above example the seller knows the quality of the product he is offering, and the functional draw back the product has. As the seller is not or cannot have a complete pros and cons of the product he will be in a dilemma to purchase the product. This is called a symmetric information Thus asymmetric information tends to reduce the reservation price of a buyer. And in the process it will drive out the high quality product, keeping only low quality in the market this is called adverse selection. Adverse selection results in market failure, to get away from this, producers generally give signaling to state the quality of their goods. For example a warranty given by a consumer durable seller is a signal that their good is of best quality. This is because if the good is of bad quality the cost of servicing will be high on the seller which reduces their profits. Thus a company giving a warranty or an extended warranty will signal the consumer regarding its quality. Soft selling is also a signaling process, here the product is offering to save a 10% costs for the firm, and if the price is front loaded the consumer will have a reservation price which will be much below 50% of saved costs. But due to soft selling by putting a proposal that 50% of the saved cost will be the price, signals the buyer that the seller is

More about Econ

Open Document