Using The Marginal Approach

Problem 1: Using the Marginal Approach (40 points)Suppose your company runs the shuttle business for 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 (40 points)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: Price Discrimination (40 points) An amusement park, whose customer set is made up of two markets, adults and children, has developed demand schedules as follows: Price($)/Quantity for Adults/Children

$5/5/20

$6/14/18

$7/13/16

$8/12/14

$9/11/12

$10/10/10

$11/9/8

$12/8/6

$13/7/4

$14/6/2

The marginal operating cost of each unit of quantity is $5. Because marginal cost is a constant, so is average variable cost. Ignore fixed costs. The owners of the amusement part want to maximize profits. Calculate the price, quantity, and profit if:The amusement park charges a different price in each market.The amusement park charges the same price in the two markets combined.Explain the difference in the profit realized under the two situations.

Problem 4: Bundling (40 points) 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 ShowtimeHistory Channel.

Customer 1: 9,2

Customer 2:3 ,8

Should Time Warner bundle or sell separately?Should Time Warner bundle if everyone likes Showtime more than the History channel (i.e., preferences are positively correlated).Suppose Time Warner could sell Showtime for $9, and History channel for $8, while making a Showtime-History bundle available for $13. Should it use mixed bundling (i.e., sells products both separately and as a bundle)?

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