1.

Suppose that a product has a reference price of p and willingness to pay is uniform over the interval [
p, p+]
for a known > 0:

if x < p ,

1
w(x; p) =
.
if p x p + ,

0
if p + < x
a) For each of the three possible cases of price p, p < p , p p p + and p + < p, express the
percentage of the customers who are willing to pay at most p in terms of p, and numbers.
ANSWER: 0, (p (
p ))/2, 1
b) For each of the three possible cases of price p, p < p , p p p + and p + < p, express the
percentage of the customers who are willing to pay at least p in terms of p, and numbers.
ANSWER: 1, 1 (p (
p ))/2, 0
c) Suppose that a top-down selling tactic increases the reference price from p to p + 1 but it does not change
the uniformity of WTP or the width of the WTP interval, express the new WTP w(x; p + 1) in terms of p,
and numbers. How much does this tactic increase the percentage of the population who buy the product
at price p for p + 1 p p + ? Express the increase in terms of p, and numbers.
ANSWER: The percentage is 1 (p (
p ))/2 with the original reference price and increases to 1 (p
(
p + 1 ))/2. The increase amount is 1/2.
estimateEx.pdf Q2:
2. Consider the quote: Hong Kong-to-New York rates fell 18 percent in the second quarter as capacity rose 14
percent in the same period. Suppose that capacity and demand grow (drop) by the same percentage and
demand is linear in the price. With (p0 , d0 ) as the last years price and linear demand assumption, first check
that we have
d0 = D mp0

Last years demand price relationship,

114d0 /100 = D m82p0 /100

This years demand price relationship.

Suppose that p0 =$3000 for a 40-foot container. Suppose that the price will drop to $2000 next year, what
will the demand be in terms of d0 ?
ANSWER: With p0 = 3000,
d0 = D 3000m

Last years demand price relationship,

114d0 /100 = D 2460m

This years demand price relationship.

Basically we need to weigh d0 = D 3000m by, say, and 114d0 /100 = D 2460m by, say, so that
D 2000m = (D 3000m) + (D 2460m).
Solution to this equation is = 23/27 and = 50/27. Inserting these , , and d0 = D 3000m and
114d0 /100 = D 2460m the equation above,
D 2000m = (D 3000m) + (D 2460m) = (23/27)d0 + (50/27)114d0 /100 = 34d0 /27.
This result can be stated as follows. Price of $2000 will increase the demand by 25.9% (=7/27) in the
forthcoming year.
differentEx.pdf Q3:
3. [Segmentation in a Lunch Market] Nazar restaurant makes a market analysis to find out that the minimum willingness to pay (wtp) for the lunch is $2.5 and maximum wtp is $12.5. Suppose that the wtp is
uniformly distributed between these limits, that there are 100 lunch customers considering to go to the Nazar
restaurant and that the cost of the lunch is $5.
a) The restaurant classifies anybody with wtp more than $8.5 as a high-paying customer. The rest are

considered low-paying customers. The restaurant will offer `a la cart service to high-paying customers and a
lunch buffet to low-paying customers. Let d1 , d2 denote the demand of high-paying and low-paying customers,
obtain the demand functions d1 (p) and d2 (p) for 2.5 p 12.5.
ANSWER: The population of high-paying customers is 40, low-paying ones are 60.


(p 8.5)+
d1 (p) = 40 1
= 40 (10p 85)+ = min{40, (125 10p)},
4


p 2.5 +
d2 (p) = 60 1
= 10(8.5 p)+ = (85 10p)+ .
6
b) If you are told that the demand functions are
d1 (p) = min{50, 125 10p},
d2 (p) = (75 10p)+ ,
at what level of wtp is the market split in to high- and low-paying customers?
ANSWER: It suffices to consider the maximum demands for both markets. They are 50 and 50, so the market
is split by the wtp of $7.5.
c) Find the optimal prices p1 and p2 for the markets specified in part b).
ANSWER: The profit from high-paying customers is (p 5)(125 10p), so we set p1 = 8.75. The profit from
low-paying customers is (p 5)(75 10p), so p1 = 6.25.
d) What is the total profit when Nazar charges p1 = 9 and p2 = 6 in the markets specified in part b).
ANSWER: The demands are 35 and 15 customers and the profit is (9-5)35+(6-5)15=155.