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1. Some high-end retailers place their most expensive products right in the entryway of the store, where consumers will see them first, and place

1. Some high-end retailers place their most expensive products right in the entryway of the store, where consumers will see them first, and place their more popular, better-selling items further back.

1.Which of the following would most likely be used by a behavioral economist as a justification for this strategy?

These stores are trying to “frame” the prices of the items in the back as the same as the prices of the items in the front.

These stores are trying to “frame” the prices of the items in the front as gains, rather than losses, relative to the items in the back.

These stores are trying to “frame” the prices of the items in the back as gains, rather than losses, relative to the items in the front.

A behavioral economist would disagree with the store’s strategy.

2 When the Macintosh computer was introduced in 1984, Apple made it difficult for third-party software developers to develop software for the platform.

Following the rule for pricing commonly owned
complements/substitute   , Apple priced both their software, as well as their computers,
below/Above   the stand-alone profit-maximizing price of each individually.

3. In 2005, Clear Channel (an owner of multiple popular radio stations) spun off concert promoter Live Nation into an independent company. Assume that music radio stations and concerts are complements in consumption.

True or False: The price of radio programming should rise.

True

False

4. Suppose Mattel, the producer of Barbie dolls and accessories (sold separately), has two types of consumers who purchase its dolls: low-value consumers and high-value consumers. Each of the low-value consumers tends to purchase one doll and one accessory, with a total willingness to pay of $72. Each of the high-value consumers buys one doll and two accessories and is willing to pay $141 in total.

Mattel is currently considering two pricing strategies:

Strategy 1: Sell each doll for $36 and each accessory for $36

Strategy 2: Sell each doll for $3 and each accessory for $69

In the following table, indicate the revenue for a low-value and a high-value customer under strategy 1 and strategy 2. Then, assuming each strategy is applied to one low-value and one high-value customer, indicate the total revenue for each strategy.

Revenue from Low-Value Customers

Revenue from High-Value Customers

Total Revenue from Strategy

$72 Value, 1 Accessory

$141 Value, 2 Accessories


($)


($)


($)

Strategy 1

$36 doll + $36 accessory

Strategy 2

$3 doll + $69 accessory

The strategy that generates the most revenue is strategy
(2/1)    .

5. A local Pilates studio recently began offering a monthly subscription service for its patrons.

Suppose a particular patron at this studio has the following willingness-to-pay schedule, per session.

Session

Willingness to Pay

1st

$77

2nd

$66

3rd

$55

4th

$44

5th

$33

6th

$22

Suppose this consumer would not demand any more sessions, even for free. Also assume that the marginal cost to the studio, per session, is constant at $11.

At a price of $71.50 per session, the number of sessions demanded by this consumer would be $___

. At this price and quantity, consumer surplus is $____

 and producer surplus is $_______

.

Suppose the studio has devised a new pricing scheme for consumers who demand more than 1 session. This pricing scheme is a subscription service, whereby consumers can pay a flat fee of $237.60 and can have up to 6 sessions total.

Using this subscription pricing model, this consumer would demand
2,3,4,5,6    sessions. Under this scenario, consumer surplus is $_____

and producer surplus is $____

. (
Hint: For consumer surplus, consider how much total value the consumer places on all sessions, versus the total price paid.)

6. Your family business uses a secret recipe to produce salsa and distributes it through both smaller specialty stores and chain supermarkets. The chain supermarkets have been demanding sizable discounts, but you do not want to drop your prices to the specialty stores.

True or False: One way to offer a lower price while defending yourself against antitrust lawsuits would be to offer a volume discount for larger salsa orders.

True

False

7. A manufacturer of microwaves has discovered that female shoppers have little value for microwaves and attribute almost no extra value to an auto-defrost feature. Male shoppers generally value microwaves more than women do and attribute greater value to the auto-defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $86 and one with auto-defrost at $153, while women value a simple microwave at $67 and one with auto-defrost at $86.

Suppose the manufacturer is considering three pricing strategies:

1.

Market a single microwave, with auto-defrost, at $86, to both men and women.

2.

Market a single microwave, with auto-defrost, at $153, to only men.

3.

Market a simple microwave to women, at $67. Market a microwave, with auto-defrost, to men at $133.

For simplicity, assume there is only 1 man and 1 woman and that if the price of a microwave is equal to an individual’s willingness to pay, the individual will purchase the microwave.

Use the following table to indicate the revenue from men, the revenue from women, and the total revenue from each strategy.

Strategy

Revenue from Men

Revenue from Women

Total Revenue from Strategy

1. Auto-Defrost Microwave only at $86

2. Auto-Defrost Microwave only at $153

3. Simple Microwave at $67, Auto-Defrost Microwave at $133

Suppose that, instead of one man and one woman, the market for this microwave consisted entirely of men. For simplicity, you can assume this means that there are two men, and no women.

Under these conditions, pricing strategy (
1,2, 3)    would maximize revenue for the manufacturer.

8. At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate).

Students with Early Classes

Students without Early Classes

Coffee

73

63

Banana

53

103

The marginal cost of coffee is 5 and the marginal cost of a banana is 20.

The café owner is considering three pricing strategies:

1.

Mixed bundling: Price bundle of coffee and a banana for 166, or just a coffee for 73.

2.

Price separately: Offer coffee at 63, price a banana at 103.

3.

Bundle only: Coffee and a banana for 126. Do not offer goods separately.

Assume that if the price of an item or bundle is no more than exactly equal to a student’s willingness to pay, then the student will purchase the item or bundle.

For simplicity, assume there is just one student with an early class, and one student without an early class.

Price Strategy

Revenue from Pricing Strategy

Cost from Pricing Strategy

Profit from Pricing Strategy

1. Mixed Bundling

2. Price Separately

3. Bundle Only

Pricing strategy (
1,2,3)     yields the highest profit for the café owner.

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