Managerial Economics

Question 29)

As manager of the only video store in town, you have noticed that on Thursday through Sunday the demand for renting your movies is much higher than it is on Monday through Wednesday. You therefore conducted a study that revealed two different market demand curves. On weekends, your inverse demand curve is P = 10 - 0.001Q; on weekdays, it is P = 5 – 0.01Q. The marginal cost of renting a movie is $.50 (50 cents). Your average customer never rents more than one movie at a time. What pricing strategy will maximize your profits?

Answer:

This manager can maximize profits by engaging in two part pricing. Since the demands are different on weekends and weekdays, the manager can adopt two different schemes.

| Weekends | Weekdays |

Inverse Demand Curve | P = 10 – 0.001Q | P = 5 – 0.01Q |

Marginal Cost (MC) | $0.5 | $0.5 |

Weekdays

Weekdays

Weekends

Weekends

Setting P = MC,

| Weekends | Weekdays |

Quantity | 0.5 = 10 - 0.001QQ = 9500 | 0.5 = 5 – 0.01QQ = 450 |

Total consumer surplus | 0.5 x (10 – 0.5) x9500= $45125 | 0.5 x (5 – 0.5) x 450= $1012.5 |

Consumer surplus per unit | 45125/9500= $4.75 | 1012.5/450= $2.25 |

For the weekends, the optimal policy is to charge a fixed fee of $4.75 to enter the store, and then rent videos at the bargain price of $0.50 each once a consumer enters the store. Since the average consumer buys one video this amount to a price of $5.25 ($4.75 + $0.5) per video.

For the weekdays, the optimal policy is charge a fixed fee of $2.25 to enter the store, and then rent videos at the bargain price of $0.50 each once a consumer enters the store. Since the average consumer buys one video this amount to a price of $2.75 ($2.25 + $0.5) per video.

Question 30)

You are the CEO of Comchip, a firm that sells specialized computers. Each of the firm's computers contain a unique chip that is produced at Comchip's west coast plant at a cost of Cw(Qc)= Q2c. Once produced, the chips are shipped exclusively to the...