Question: Subway, the fast-food chain, sells foot-long sandwiches for $5 each. However, Subway still sells 6-inch sandwiches for considerably more than $2.50 each, that is, at a higher price per inch of sub.
a. Can you think of a way that in theory you could make money from Subway's pricing practices? Would this method work in practice? What does this tell you about the limits of arbitrage?
b. In many of our price discrimination examples, we think that businesses try to break customers into two groups: more price-sensitive and less price-sensitive. What kinds of Subway customers fit into the first group? Into the second?