Reference no: EM13903961
1. Suppose an airline flying on the Charlotte - Chicago route has estimated the demand curves for three di?erent types of customers: business (no advance purchase), leisure (7 day advance puchase), and discount (14 day advance purchase) travellers. They are: Business: P = 600 − Q and MR = 600 − 2Q Leisure: P = 500 − 2Q and MR = 500 − 4Q; Discount: P = 400 − 3Q and MR = 400 − 6Q. Assume there is only one class of service, hence the marginal cost of providing the service is equal for all customers and is $100. What prices will the airline charge to each of the three diferent segments of customers. (Hint: Set MR=MC for each class of travel).
2. The relationship between Price elasticity of demand and Marginal Revenue
can be shown to be:
MR = P 1 − 1 |e|
There are two types of customers that come to the Barnegat Fish Company to have their signature crabcakes: An a?uent group with a price elasticity of demand for crabcakes of e = −2; and a less wealthy type with a price elasticity of demand for crabcakes of e = −5. The restaurant wants to introduce a coupon to encourage more people to visit their restaurant. Thus every buyer pays the posted price of $P per crabcake but those who tender the coupon get a discount of $X o? the posted price. If the Marginal Cost of a crabcake is $2.00, what is the price of the crabcake and what is the value of the coupon?(Set MR=MC).
3. Consider a model of two firms (Firm 1 and Firm 2)competing against each other and setting prices simultaneously. Suppose they have a choice of setting either P = $5 or P = $8. If both of them set the lower price they split the total profits of $44 equally(i.e. each of them gets $22). If they both set the higher price, they split the total profits of $82 equally(i.e. each of them gets $41). However, if one of them charges the lower price while the other firm charges the higher price, the lower price firm earns a profit of $60, while the other firm earns a profit of $14. The payo? matrix is given below. Does Firm 1 and 2 have a dominant strategy each? What is the Nash Equilibrium? Explain briefly.
Strategies for Firm 2
$5 $8
Strategies $5 (22, 22) (60, 14)
for Firm 1 $8 (14, 60) (41, 41)
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