Question 1: Joseph Gallo relates that he poured two glasses of wine from the same bottle and put a price of 10 cents a bottle on one and 5 cents a bottle on the other. He let people test both and asked them which they wanted. Most wanted the 10-cent bottle, even though they were the same one.
a. What does it tell us about people?
b. Can you think of other areas where that may be the case?
c. What does this suggest about pricing?
Question 2: Suppose Charlie Parker CDs cost $10 apiece and Lester Young CDs cost $5 apiece. You have $40 to spend on CDs. The marginal utility that you derive from additional CDs is as follows:
NUMBER of CDS Charlie Parker Lester Young
Have 0 buy number 1 60 30
Have 1 buy number 2 40 28
Have 2 buy number 3 30 24
Have 3 buy number 4 20 20
Have 4 buy number 5 10 10
How many of each CD would you buy? Suppose the price of a Lester Young CD rises to $10. How many of each CD would you buy? Use this to show how the principle of rational choice leads to the law of demand.
Question 3: Use the graph in the second column of page 257 under question 17 to answer the following. It shows the marginal cost and average total cost curves for the shoe store Zapateria, a perfectly competitive firm.
a. How many pairs of shoes will Zapateria produce if the market price of shoes is $70 a pair?
b. marginal cost and average total cost curves for the shoe store Zapateria
c. Should Zapateria expect more shoe stores to enter this market? Why or why not?
d. What is the long-run equilibrium price in the shoe market assuming it is a constant-cost industry?
Question 4: Norplant, a long-acting contraceptive, dates to the early 1990's. In the US, they were priced at $350 and in other countries at $23.
a. Why would the firm price it differently in different countries?
b. What do you think will happen to the price over time? Why?