Assignment

Question 1

A theater on Broadway recently increased the price of a ticket for a popular play by 8%. The attendance went down by 3%. What is the price elasticity of demand for tickets for this play? (2 points) What factors, besides the increase in the price of the ticket, could have contributed to the reduction in attendance? (3 points) Should the theater further increase or instead decrease the price of the ticket? What would be the optimal price of a ticket?

Question 2

Auto Parts, Inc. is medium-sized company that manufactures auto parts in Buffalo, New York. The company currently loses $30,000 per month. The owner of the company is evaluating whether she should shut down the factory. She thinks that the factory should continue to operate until the economic environment improves and buyer for the factory can be identified. The logic of the owner is that her company has already invested millions of dollars in the factory over the years. The monthly fixed costs for the factory are $40,000. The CEO of Auto Parts, Inc. thinks the factory should be shut down because most the monthly fixed costs ($40,000/month) are sunk costs.

• Evaluate the arguments of the owner and CEO.
• Provide a recommendation as to whether Auto Parts, Inc. should shut down its factory in Buffalo.

QUESTION 3

Digital Books, LLC is a company that sells e-books related to career advising and professional development. Digital Books, LLC earns a yearly positive economic profit of $25,000 if it can sell 10,000 e-books. Each time, a customer buys an e-book it incurs a cost of $0.50 (cost of downloading each e-book). Digital Books, LLC spends each year $100,000 developing new e-books (new topics and new editions). What is Digital Books, LLC's profit-maximizing price?

QUESTION 4

Assume you are the owner of a concert hall with 6,000 seats. The demand function for seat tickets is Q = 10,000 - 200P where Q is the quantity demanded and P is the price for a seat ticket. You are charging $30 per ticket and selling tickets to 4,000 consumers. Further assume that you incurred only fixed costs. Is charging $30 the optimal pricing policy? (5 points) What other pricing policy might you use to increase your profits? (10 points) Could you increase profits through price discrimination? If so, what type of price discrimination should you use?

QUESTION 5

Assume you run a company that offers a product for which all consumers have an identical demand curve. Each consumer's demand curve is P = 20 - 4Q. The marginal cost of production is $4. Devise an optimal two-part tariff pricing policy.

QUESTION 6

Jennifer Shapiro is a worker for XYZ Company. She has an effort cost function of C = 2e2 and a monthly reservation wage of $2,500. Her wage function is W = 2,500 + 0.4Q. If the incentive coefficient is equal to 0.4 then Q = 300e. Q is Jennifer's output. Assume that the incentive coefficient decreases from 0.4 to 0.3 and Jennifer's base salary increases from $2,500 to $2,700.

• What will happen to her level of effort?
• How will this change XYZ Company's profits?

QUESTION 7

Motorcycles USA is a company that manufactures and sells motorcycles in North America. It has the following demand function for its motorcycles:

P = 30,000 - 100Q

Motorcycles USA has a marginal cost (MC) that is constant and equal to $4,000.

What will Motorcycles USA's price be if it decides to sell the motorcycles by itself? What will the price be if it sells them though MC Dealership, LLC an independent distributor?

Consider that when Motorcycles USA contracts with MC Dealership, LLC, it takes into account that MC Dealership, LLC faces the same demand curve. Assume that (MC) is constant and equal to $4,000.

What is the impact of distributing the motorcycles through MC Dealership, LLC on the price of the motorcycles?