214ECN Managerial Economics

Seminar 6

Q1. You are the manager of a firm that produces products X and Y at zero cost. You
know that different types of consumers value your two products differently, but you
are unable to identify these consumers individually at the time of the sale. In
particular, you know there are three types of consumers (1,000 of each type) with the
following valuations for the two products:

Consumer Type Product X Product Y

1 60$ 50$
2 50 125
3 25 140

a. What are your firm’s profits if you charge $25 for product X and $50 for product
Y?
b. What are your profits if you charge $60 for product X and $140 for product Y?
c. What are your profits if you charge $110 for a bundle containing one unit of
product X and one unit of product of Y?
d. What are your firm’s profit if you charge $175 for a bundle of containing one unit
of X and one unit of Y, but also sell the products individually at price of $60 for
product X and $140 for product Y?

Q2. You are a pricing analyst for QuantCrunch Corporation, a company that recently
spent $10,000 to develop a statistical software package. To date, you only have one
client. A recent internal study revealed that this client’s demand for your software is
Qd=100-0.1P and that it would cost you $500 per unit to install and maintain software
at this client’s site. The CEO of your company recently asked you to construct a
report that compares (1) the profit results from charging this client a single-unit price
with (2) the profit that results from charging $900 for the first 10 unit and $700 for
each additional unit of software purchased. Construct this report, including in it a
recommendation that would result in even higher profits.

Q3. As a manager of a chain of movie theaters that are monopolies in their

respective markets, you have noticed much higher demand on weekends than during
the week. You therefore conducted a study that has revealed two different demand
curves at your movie theatres. On weekends, the inverse demand function is P=15-
0.001Q; on weekdays, it is P=10-0.001Q. You acquire legal rights from movie
producers to show their films at a cost of $20,000 per movie, plus a $2 “royalty” for
each movie-goer entering your theatres (the average moviegoer in your market
watches a movie only once). Devise a pricing strategy to maximize your firm’s
profits.

Q4. Magazines are distributed through both newsstands and subscriptions. They
derive revenue from both selling the publication and advertising. Many also publish
their content through the World Wide Web.

a. The larger a title's circulation, the more its publisher can charge for advertising.
How should a publisher take account of this factor in setting the cover price of a
magazine?
b. From the reader's standpoint, what are the differences between buying at a
newsstand and through subscription? How should a publisher price subscriptions
relative to newsstand sales?
c. The Web edition is particularly beneficial to business executives who travel
frequently and subscribers in locations that are poorly served by mail delivery from
the magazine printers. Should a magazine provide the Web edition free to
subscribers or levy an additional charge for it?