Assignment

1. RJCorman Corp. commissions you to evaluate the economic viability of dinner trains in the central Kentucky region. Since they are the only company capable of setting up and running a dinner train operation, the market demand will be their demand. They have already conducted a demand study and determined that nightly demand on Fridays and Saturdays is given by Q = 300 - 5P, where Q is the number of customers and P is the price of the dinner excursion package in dollars. They have also determined that their marginal costs are constant at $20 per customer (i.e. MC = AVC = $20), and that they incur fixed operational costs of $1000 (TFC = $1000) every time they crank up the locomotive and haul dining cars around the countryside for three or four hours. Is this a losing proposition, or can RJCorman make an economic profit running a dinner train? Obviously you should evaluate the profit-maximizing output and price, and illustrate and explain what profits (or losses) will be earned.

2. Confirm that the inverse-elasticity pricing rule holds for the profit-maximizing price you calculated in the previous problem. (Hint: use the point elasticity formula: ε = (ΔQ/ΔP)(P/Q) to calculate own-price elasticity of demand.)

3. You own and operate a bar close to the UK campus. After some experimentation, you determine that the typical male patron has the following demand for beer: q = 5 - PB. PB is the price per beer and q is number of beers each male patron chooses to consume on any given visit to your bar. Your costs for beer are MC = AC = $1.

a) What price per beer will maximize profit, how many beers will each patron consume, and what will you earn on each customer? Illustrate in the diagram on the attached sheet.

b) Now, suppose you can charge an entry fee or cover charge to get in the bar. Would you set PB differently? What cover charge would you set? What profits will you earn on each customer? Illustrate in the diagram.

c) Finally, let's consider how your overall pricing strategy affects the number of customers who come to your bar. Suppose F = 50 - 10CVF and M = 35 + F - 5PB - 2CVM , where F is the number of female customers, M is the number of male customers, CVF is the cover charge for female patrons, and CVM is the cover charge for male patrons. Discuss conceptually (don't calculate) how you might take these interactions into account in setting the price for beer and the cover charges for males and for females. Why might setting different beer prices for males and for females be problematical?

4. Using Porter's five forces model, briefly explain what popped the cork monopoly.