3rd Degree price discrimination. Sal's satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two groups are: PNY 150 3 * QNY or QNY = 50 - 1/3 * PNY 3/2 * QLA or QLA PLA 120 80- 2/3 PLA where Q is in thousands of subscriptions per year and P is the subscription price per year. The cost of providing Q units of service is given by C 100030 * Q and MC 30 where Q QNY QLA What are the profit maximizing prices and quantities for New York and Los Angeles markets? a) Draw the graphs of both the NY and LA markets and determine the optimum prices and quantities. Note that MRNY 150 6 QNY and MRLA = 120 - 3 * QLA b) What are the elasticities of demand for the NY and LA markets? c) For third degree price discrimination, what is the relationship between pricing and elasticity of demand in the two markets? d) Under what conditions can a firm do third degree price discrimination?

3rd Degree price discrimination. Sal's satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two groups are: PNY 150 3 * QNY or QNY = 50 - 1/3 * PNY 3/2 * QLA or QLA PLA 120 80- 2/3 PLA where Q is in thousands of subscriptions per year and P is the subscription price per year. The cost of providing Q units of service is given by C 100030 * Q and MC 30 where Q QNY QLA What are the profit maximizing prices and quantities for New York and Los Angeles markets? a) Draw the graphs of both the NY and LA markets and determine the optimum prices and quantities. Note that MRNY 150 6 QNY and MRLA = 120 - 3 * QLA b) What are the elasticities of demand for the NY and LA markets? c) For third degree price discrimination, what is the relationship between pricing and elasticity of demand in the two markets? d) Under what conditions can a firm do third degree price discrimination?

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter3: Demand Analysis

Section: Chapter Questions

Problem 1E: The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales...

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The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomacs closest competitor, Spring City Stove Works, cut its price for a closely competitive model from $600 to $450. Potomac noticed that its sales volume declined to 4,500 units per month after Spring City announced its price cut. What is the arc cross elasticity of demand between Potomacs oven and the competitive Spring City model? Would you say that these two firms are very dose competitors? What other factors could have influenced the observed relationship? If Potomac knows that the arc price elasticity of demand for its ovens is 3.0, what price would Potomac have to charge to sell the same number of units it did before the Spring City price cut?
The Johnson Robot Company’s marketing managers estimate that the demand curve for the company’s robots in 2008 is P = 3,000 - 40Q where P is the price of a robot and Q is the number sold per month. If the firm wants to maximize its dollar sales volume, what price should it charge? a. $3000 b. $1000 c. $1500 d. $750
A10. The demand function for a firm's domestic and foreign markets are: AT) (5.4) P¡ = 50 - 401 Pa=40- 5Q2 and the total cost function is: TC= 25 + 120, where Q = Qi + Q. a/ Determine the prices needed to maximize profit with and without price discrimination; b/ Find the maximum profit values in these two cases and give your comment.
A cruise ship company offers two packages to its clients: an “economy” package and a “deluxe” package with more amenities to its higher-paying customers. The company estimates that its customers have the following demand functions: Economy package: Q(E) = 20,000 - 10PE Deluxe package: Q(D) = 5900 - 1.5PD The costs for the two services (as a function of the number of passengers) are: Economy passenger: C(QE) = 5000 + 100QE + 0.1Q^2E Deluxe passenger: C(QD) = 5000 + 200QD + 6Q^2D What prices should the company set for the economy and deluxe packages? What are the number of passengers that the ship will have in each package, and how much profit does the company make per cruise? Now assume the ship has a maximum capacity of 4,000 people. How many spaces should be arranged for deluxe passengers and how many for economy? What prices should the company set for the two packages? What is the profit for the company now?
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A monopolist is currently selling 400 units of output at a price of $20 per unit. The elasticity of demand is € = 2. Would this firm wish to sell an additional unit for $19.50 if it could do so without cutting the price charged for the first 400 units sold? Would a perfect competitor ever wish to sell an additional unit at a lower price? Why or why not.
Each year a new group of high school seniors chooses where they want to attend college. The college faces two identifiably different categories of customers, in-state and out-of-state students. The (inverse) demand equation for in-state students is given by PI=$9000- QI, while demand by out-of-state students is given by PO= $21,000 -9QO. P represents the annual tuition charged by the college and Q represents the number of students who enter as freshmen. The marginal cost of educating an additional student is constant and equal to $3000. Suppose that the Board of Trustees wants to act as a profit-maximizing monopolist in setting price and output. What tuition should they charge for in-state and out-of-state students, and how many of each would enroll each year?
Enrodes is a monopoly provider of residential electricity in a region of northern Michigan. Total demand by its 3 million households is Qd = 1,500 − 2P, and Enrodes can produce electricity at a constant marginal cost of $4 per megawatt-hour. Consumers in this region of Michigan have recently complained that Enrodes is charging too much for its services. In fact, a few consumers are so upset that they are trying to form a coalition to lobby the local government to regulate the price Enrodes charges. If all the consumers of this region joined the coalition against Enrodes, how much would each consumer be willing to spend to lobby the local government to regulate Enrodes’s price? Do you think the consumers will be successful in their efforts? Explain.
Baker Enterprises operates a midsized company that specializes in the production of a unique type of memory chip. It is currently the only firm in the market, and it earns $10 million per year by charging the monopoly price of $115 per chip. Baker is concerned that a new firm might soon attempt to clone its product. If successful, this would reduce Baker’s profit to $4 million per year. Estimates indicate that, if Baker increases its output to 280,000 units (which would lower its price to $100 per chip), the entrant will stay out of the market and Baker will earn profits of $8 million per year for the indefinite future. 1. What must Baker do to credibly deter entry by limit pricing? 2. Does it make sense for Baker to limit price if the interest rate is 10 percent?
You are the manager of a monopoly that sells a product to two groups of consumers in different parts of the country. Analysts at your firm have determined that group 1’s elasticity of demand is −3, while group 2’s is −5. Your marginal cost of producing the product is $40. a. Determine your optimal markups and prices under third-degree price discrimination. Markup for group 1: Price for group 1: Markup for group 2: Price for group 2: $ b. Which of the following are necessary conditions for third-degree price discrimination to enhance profits.
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 $.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 have had some limited success in reducing smoking. What price reaction (if any)…
A monopolist is currently selling 400 units of output at a price of $20 per unit. The elasticity of demand is € = 2 (negative number). Would this firm wish to sell an additional unit for $19.50 if it could do so without cutting the price charged for the first 400 units sold? Would a perfect competitor ever wish to sell an additional unit at a lower price? Why or why not.