Assignment:
You will submit your answers in a Blackboard assessment filling out charts and answering the essays/short answer questions.
Problem 1: Using the Marginal Approach
Suppose your company runs a shuttle business of a hotel to and from the local airport. The costs for different customer loads are:
1 customer: $30
2 customers: $32
3 customers: $35
4 customers: $38
5 customers: $42
6 customers: $48
7 customers: $57
8 customers: $68.
What are your marginal costs for each customer load level?
If you are compensated $10 per ride, what customer load would you choose?
Problem 2: Elasticity and Pricing
Suppose the number of firms you compete with has recently increased. You estimated that as a result of the increased competition, the demand elasticity has increased from -2 to -3, i.e., you face more elastic demand. You are currently charging $10 for your product. What is the price that you should charge, if demand elasticity is -3?
Problem 3: Bundling
Time Warner could offer the History Channel (H) and Showtime (S) individually or as a bundle of both. Suppose the reservation prices of customers 1 and 2 (the highest prices they are willing to pay) are presented in the boxes below.
The cost to Time Warner is $1 per customer for licensing fees.
Preferences
1. Should Time Warner bundle or sell separately?
2. Should Time Warner bundle if everyone likes Showtime more than the History Channel, i.e., preferences are positively correlated.
3. Suppose Time Warner could sell Showtime for $9, and History channel for $8, while making Showtime-History bundle available for $13. Should it use mixed bundling. i.e., sells products both separately and as a bundle?