1. The table below provides the utility John receives from watching movies per month.
|
Number of movies
(per month)
|
Total Utility
|
Marginal Utility
|
|
0
|
0
|
|
|
1
|
25
|
|
|
2
|
47
|
|
|
3
|
66
|
|
|
4
|
82
|
|
|
5
|
94
|
|
|
6
|
105
|
|
(a) Complete the table.
(b) Suppose Edwards Cinema Theater charges $15 per ticket. How many movies will John want to watch in a month?
(c) Calculate John's consumer surplus from watching movies in that month.
(d) Calculate Edwards Cinema Theater's revenue from selling tickets to John in a month.
(e) If Edwards were to start a movie club where viewers would have to pay a monthly membership fee but would pay a discounted price of $10 per ticket, how many movies would John now watch in a month? What should be the optimal monthly membership fee
for Edwards?
2. Analysts from Kellogg's have recently observed that revenues from their Raisin Bran line of cereals has remained unchanged regardless of the price cuts Kellogg's has implemented over the last month. Explain what this implies about the elasticity of demand for Kellogg's Raisin Bran cereal.
3. Rainbow Inc sells its product to two independent markets: Market A and Market B. Suppose so far it charges the same price $10 for its product in both markets. Now, suppose it does some marketing research and learns that in Market A, consumers respond to a 1% change in price with a 2% change in quantity demanded of Rainbow's product; and in Market B, consumers respond to a 1% change in price with a ½ % change in quantity demanded.
(a) Calculate the elasticities of demand for Rainbow's product in Market A and Market B.
(b) Suppose Rainbow is deciding to charge different prices in the two markets instead of its current practice of charging the same price $10 in both markets. Suppose it wants to charge a higher price, say, $12 in one market and a lower price, say $8 in the other market. Based on the elasticities calculated in (a), in which market will it charge $12 and in which market will it charge $8? Explain your answers.
(c) Suppose you are told that Rainbow sold 100 units in Market A and 100 units in Market B when it charged $10 to both. Using the elasticities calculated in (a) and based on your answer in (b), calculate the change in quantity sold in the two markets with the different
prices. How much will be the new quantities sold in the two markets with the different prices? [Hint: Keep in mind that the quantity sold will be lower in the market where Rainbow is charging the higher price, $12 and the quantity sold will be higher in the market
where Rainbow is charging the lower price, $8].
(d) Compare Rainbow's total revenue with different prices to its revenue from the same price $10.
4. Consider CP Manufacturing's pricing problem for a new project: Suppose it has estimated its total fixed costs (costs of renting land, maintenance of facilities etc.) at $30,000. Its variable unit cost (costs of raw material, labor going into producing each unit of CP's products) is estimated to be $60 per unit.
(a) Suppose CP estimates demand for its product to be 1000 units. It decides to implement a 5% mark-up when deciding on the price per unit of its product. Calculate the price per unit.
(b) Using the price per unit obtained in (a), derive the break-even quantity that CP Manufacturing needs to sell. Comparing to the estimated demand in (a), would you say the mark-up CP used above makes the new project profitable or not?