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Problem Set ECON 550

1) You are serving as the chair for your community’s annual wellness campaign. A key
event is
the annual Walk 3k, Run 10k, Ride 20k event. The event is staged entirely by volunteers and the
goal is to attract community-wide awareness of getting active as a key step to wellness. In other
words, the goal is not to raise money, but to prompt awareness. As the chair you set a financial
goal to breakeven on the one and only cost of the event, a fitness bag with the community seal
and the event moto, “I AM ON THE RIGHT TRACK!
The cost of the bags, which must be ordered in batches of 100, are:

Variable Marginal
Bags Fixed Cost Total Cost Total Revenue
Cost Cost
0 1700 0 1,700 0 $0.00
100 1700 500 2,200 500 $1,500.00
200 1700 1200 2,900 700 $3,000.00
300 1700 2700 4,400 1,500 $4,500.00
400 1700 5200 6,900 2,500 $6,000.00
500 1700 9000 10,700 3,800 $7,500.00
600 1700 15000 16,700 6,000 $9,000.00
700 1700 23800 25,500 8,800 $10,500.00
800 1700 36800 38,500 13,000 $12,000.00
900 1700 55800 57,500 19,000 $13,500.00
1000 1700 83000 84,700 27,200 $15,000.00

Breakeven point is no profit no loss situation where Total cost = Total revenue.

here the nearest break-even bag quantity is either 200 Units

2) Your marketing department just undertook a major advertising campaign promoting the

quality of your Best Brand Bike Shorts-BBB Shorts. They have provided you with an estimate

of the success of the campaign stating that: “the price elasticity of demand has decreased from
-5.76 to -3.76.”

Given -
The price elasticity of demand before = -5.76
Decreased price elasticity of demand = -3.76
Before the campaign price was $240 per pair of BBB Shorts
To find - The new price
Solution
%change∈quantity
Price Elasticity of Demand =
%change∈ price

−1
(P-MC)/P= , where P is the price, MC is the marginal cost and Ed is the the price elasticity of
Ed
demand.
At the original price of $240,
At the new price MC=198.33 and Ed=-
(P− MC) −1 3.76
= (P− MC) −1
p Ed =
p Ed
($ 240−MC ) −1
= (P−$ 198.33) −1
$ 240 −5.76 =
p −3.76
($240-MC) =$240*(1/5.76)
(P-$198.33) =P*(1/3.76)
($240-MC) =$41.67
MC=$240-4167 ((P-$198.33) =0.2660*P

P-0.2660P=$198.33

0.734P=$198.33

P=$198.33/0.734

3) Seven years ago, you started a cross-town delivery service. The service is an

environmentally friendly business and, given all the traffic congestion, you are also the

fastest service in the city since your entire crew are bicyclists. You have two types of

service. You have a small parcel service for anything that is flat and measures less than

11x17. You have a package service using a 100 lb capacity bike trailer for anything

weighting up to 10 lbs. As a way to introduce the new package service when you
implemented the small package service you charged the same price for packages as

parcels. You are now wondering if you should charge different prices for the parcel and

package service.

Combined Parcels & Packages

Parcels and TR MR TC MC MR-MC Profit


Packages
50 $5,000.00 $100.00 1600 $32.00 $68.00 $3,400.00
120 $10,800.00 $90.00 2300 $19.17 $70.83 $8,500.00
190 $15,200.00 $80.00 3000 $15.79 $64.21 $12,200.00
260 $18,200.00 $70.00 3700 $14.23 $55.77 $14,500.00
330 $19,800.00 $60.00 4400 $13.33 $46.67 $15,400.00
400 $20,000.00 $50.00 5100 $12.75 $37.25 $14,900.00
470 $18,800.00 $40.00 5800 $12.34 $27.66 $13,000.00
540 $16,200.00 $30.00 6500 $12.04 $17.96 $9,700.00
610 $12,200.00 $20.00 7200 $11.80 $8.20 $5,000.00
680 $6,800.00 $10.00 7900 $11.62 -$1.62 -$1,100.00
The Parcels Market

Price Parcels TR MR TC MC MR - Profit


MC
100 0 0 100 1150 0 $100.00 -1150
90 50 4500 90 1650 33.00 $57.00 2850
80 100 8000 80 2150 21.50 $58.50 5850
70 150 10500 70 2650 17.67 $52.33 7850
60 200 12000 60 3150 15.75 $44.25 8850
50 250 12500 50 3650 14.60 $35.40 8850
40 300 12000 40 4150 13.83 $26.17 7850
30 350 10500 30 4650 13.29 $16.71 5850
20 400 8000 20 5150 12.88 $7.13 2850
10 450 4500 10 5650 12.56 -$2.56 -1150
The Packages Market

Price Packages TR MR TC MC MR-MC Profit


100 50 $5,000.00 100 450 $9.00 $91.00 $4,550.00
90 70 $6,300.00 90 650 $9.29 $80.71 $5,650.00
80 90 $7,200.00 80 850 $9.44 $70.56 $6,350.00
70 110 $7,700.00 70 1050 $9.55 $60.45 $6,650.00
60 130 $7,800.00 60 1250 $9.62 $50.38 $6,550.00
50 150 $7,500.00 50 1450 $9.67 $40.33 $6,050.00
40 170 $6,800.00 40 1650 $9.71 $30.29 $5,150.00
30 190 $5,700.00 30 1850 $9.74 $20.26 $3,850.00
20 210 $4,200.00 20 2050 $9.76 $10.24 $2,150.00
10 230 $2,300.00 10 2250 $9.78 $0.22 $50.00

From the analysis of all three strategies we can say that single pricing strategy for parcel

& package is better than the different pricing policy because it is generating maximum

profit.

4) You help couples book their perfect honeymoon. You currently offer plans for a cruise

and for a casino stay. Your sale manager is getting her MBA and has suggested you

might consider bundling as a way to boost profits.

a) Here are the customer preferences and your cost are $100 for the first booking

and $50 for each additional booking. Compare the profit with and without

bundling. Which strategy should be used? Show your calculations.


We Book Your Honeymoon Tour

Cruise Casino
Customer 1 $7,000 $3,000

Customer 2 $2,000 $6,000


Bundling refer to a strategy used by the company to combine various products or services

together in a single bundle and sell at lower price than they would have sold if the units were

sold alone. The strategy helps the company improve their product mixing strategy since it

increases the number of items bought by individual customer. In most cases, the collected items

are related but the company can also combine unrelated items. One of the examples of bundling

is cruise and casino.

Cost Cost
Particular Cruise Casino Without Bundling with Bundling
Customer 1 $7,000.00 $3,000.00 $8,170.00 $6,700.00
Customer 2 $2,000.00 $6,000.00 $6,860.00 $5,360.00
Total $9,000.00 $9,000.00 $15,030.00 $12,060.00

 Our cost of $100 for first booking and $50 for each additional customer will not be considered
while calculation the Net benefit from Bundling, because this cost will remain same whether or
not bundling is done.
From above Table, it is clear that due to bundling of services, our cost will get reduced to
$12,060 from $15,030