5 econ questions due tomorrow at noon EST

Introduction
These scenarios will give you practice applying concepts from the readings to models of real-world situations.

Activity Instructions
Read the following scenarios and complete the corresponding questions. Please remember to answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and use the opportunity to clearly demonstrate your newly acquired knowledge.

Scenario 1 (length: as needed)
Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug’s marginal cost is constant at $5 per dose. The demand schedules for both regions are given below. 

        

US

Foreign

Price

Quantity

Quantity

  $60

   1,000

    200

   55

   1,500

    250

   50

   2,500

    400

   45

   4,000

    600

   40

   8,000

  1,000

   35

 14,000

  2,000

   30

 20,000

  3,500

   25

 30,000

  7,000

   20

 40,000

 16,000

   15

 55,000

 35,000

   10

 65,000

 75,000

    5

 77,000

150,000

 

  1. Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine?  What price should be charged to maximize profit?
  2. If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market?  What happens to the company’s profit?

Scenario 2 (length: as needed)
Apple (relatively) recently introduced different “versions” of the iPhone and iPad—in particular, currently Apple sells four versions of the iPad (iPad Air, iPad with Retina display, iPad mini with Retina display, and the iPad mini– http://www.apple.com/ipad/compare/). Note that the “top of the line” iPad and iPad mini are available with hard drives that range from 16GB to 128GB, and with the A7 chip. The other versions of the iPad and iPad mini are only available with a 16GB hard drive and feature slower chips (A6X and A5), but at a lower price than the top of the line models.

  1. Briefly explain why continuing to sell the older models when the newer generation’s models are introduced is an example of price discrimination. How does this help Apple reach a larger market? 
  2. Why are the lower tier models are currently only available with the 16GB hard drive, when previously (when they were the top of the line models) they were available with larger hard drives?
  3. When the iPad mini was first introduced, industry experts estimated that for every 4 million iPad minis that were sold, sales of the full-sized iPad would decrease by 1 million units. Assuming that is the case, explain why introducing the iPad mini was a good idea, even with some level of cannibalization.

 

Scenario 3 (length: as needed)
The marginal cost of producing a particular item is $2.50. Suppose a consumer is willing to purchase one item at $10, a second unit of that item at $9, a third unit of that item at $8, and so on. This means that the consumer’s demand schedule looks like:

Price

Quantity

  $10

 1

   9

   2

   8

   3

   7

   4

   6

   5

   5

 6

   4

 7

   3

 8

   2

 9

1

10

    1. If the firm must set a single price and sell all of its units, what price will it select to maximize profits? What will the profit be?
    2. Suppose the firm can apply a ‘volume discount’, pricing the first good at $10, pricing the second unit at $9, and pricing the third unit at $8, and so on. What is the smallest per-unit price the firm will want to offer? Assuming the volume discount ends at (or before) that price, what will the firm’s profit be?

 

Scenario 4 (length: as needed)
You are in charge of setting the optimal price for tickets for a local hockey team.  The demand schedule for hockey tickets is below:

Price

Quantity

  $10

   6,000

   11

   5,900

   12

   5,750

   13

   5,500

   14

   5,200

   15

 4,900

   16

 4,500

   17

 4,000

   18

 3,500

    1. What price maximizes the revenue from tickets? (Note, since marginal costs are assumed to be zero, this also maximizes profits)
    2. Each spectator also spends money parking and on concessions. The team owns both the nearby lots and the concession stands at the arena. The team has estimated that concession profits increase by $5 per person, and for every four spectators, one parking permit that is priced at $10 is purchased. With these new sources of revenue, what is the optimal ticket price?

 

Writing Requirements

      • Length: as indicated (Show your calculations where appropriate.)
      • 1-inch margins
      • Double spaced
      • 12-point Times New Roman font
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