Reference no: EM131138998

Answer the following questions:

1. Ford offers a 3-year or 36,000 mile warranty on the Explorer car. Consumers must pay for extended warranties beyond the manufacturer's warranty period. The Auto Club offers an extended warranty for a Ford Explorer in Hanover, New Hampshire, at a price of $1,259. This would cover years 4 and 5, after the expiry of manufacturer's warranty.

(a) Explain the role of discounting in your decision whether or not to purchase the extended warranty

(b) Suppose that the expected repair costs for years 4 and 5 are $800 per year. If your discount rate is 6% per year, should you purchase the extended warranty?

(c) Would your decision be different if your discount rate is 1% per year?

2. In each of the following instances, discuss whether horizontal or vertical boundaries have been changed, and whether they were extended or shrunk.

(a) Canadian manufacturer of regional jets, Bombardier, launched the CSeries, a family of 100- to 149-seat, long-range jets.

(b) Software publisher, Microsoft, acquired Skype, a provider of Internet telephony services.

(c) The conglomerate, General Electric, divested its subsidiary, NBC Universal, to be merged with cable TV provider, Comcast.

3. Students at the University of California, Los Angeles, enjoy several privileges. One is a good education at a low price. Another is California's unbeatable weather, and a third is access to discounted movie tickets. Suppose that Alan buys 12 tickets a year at $7 rather than the full price of $10. By how much does he gain from the discount scheme?

(a) One answer is that Alan "saves" $10 - $7 = $3 on each ticket, which adds to a total of $3 x 12 = $36. Explain why this under-estimates Alan's gain.

(b) Using a suitable figure and the concept of buyer surplus, explain how much Alan gains from the discount scheme.

(c) Taking account of the discount movie scheme, by how much could the University raise Alan's tuition fees?

4. Among commercial users such as apartment buildings, hotels, and offices, the demand for water is estimated to have an own-price elasticity of -0.36, elasticity with respect to the number of commercial establishments of 0.99, and elasticity with respect to the average summer temperature of 0.02. (Source: Martin Williams and Byung Suh, "The Demand for Urban Water by Customer Class", Applied Economics, Vol. 18, 1986, 1275-89.)

(a) How would an increase in the number of commercial establishments affect the demand for water? Is the estimated elasticity consistent with your explanation?

(b) How would a rise in temperatures affect the demand for water? Is the estimated elasticity consistent with your explanation?

(c) By considering the own-price elasticity of demand, explain how the water provider could increase its profit.