Name: Phm Khnh Huy

Class: BBC 5.4

Managerial of Economic

Chapter 11

7. You are the manager of a firm that produces products X and Y at zero cost. You know that
different types of consumers value your two products differently, but you are unable to identify
these consumers individually at the time of the sale. In particular, you know there are three types
of consumers (1,000 of each type) with the following valuations for the two products:
Answer:
a. $300,000 (since all consumers purchase each product, you earn $120,000 on sales of
good X and $180,000 on sales of good Y).
b. $250,000 (since only the highest valuation type purchases each product, you earn
$90,000 on sales of good X and $160,000 on sales of good Y).
c. Since all consumers receive at least $150 in value from the bundle, all types buy the
bundle. Profits are thus $450,000.
d. Type 2 consumers will purchase the bundle. Type 1 consumers will purchase good X
only, and type 3 consumers will purchase product Y only. Total profits are thus
$210,000 + $90,000 + $160,000 = $460,000.

8. A large firm has two divisions: an upstream division that is a monopoly supplier of an input
whose only market is the downstream division that produces the final output. To produce one

unit of the final output, the downstream division requires one unit of the input. If the inverse
demand for the final output is P= 1,000 - 80Q, would the companys value be maximized by
paying upstream and downstream divisional managers a percentage of their divisional
profits? Explain.
Answer:
No. This would provide managers an incentive to maximize divisional profits, which would lead
to double marginalization.

11. You are the owner of a local Honda dealership. Unlike other dealerships in the area, you take
pride in your No Haggle sales policy. Last year, your dealership earned record profits of $1.5
million. However, according to the local Chamber of Commerce, your earnings were 10 percent
less than either of your competitors. In your market, the price elasticity of demand for midsized
Honda automobiles is 4.5. In each of the last five years, your dealership has sold more midsized
automobiles than any other Honda dealership in the nation. This entitled your dealership to an
additional 30 percent off the manufacturers suggested retail price (MSRP) in each year. Taking
this into account, your marginal cost of a midsized automobile is $11,000. What price
should you charge for a midsized automobile if you expect to maintain your record sales?
Answer:
Since this is a three-firm oligopoly in your market, and -1.3 is the market-level elasticity in your
market, the profit-maximizing price is as follows:
P=

EF
N EM
3(1.3)
MC =
$ 12,000=
$ 12,000=$ 16,137.93 .
1+ E F
1+ N E M
1+3 (1.3)

) (

12. You are a pricing analyst for QuantCrunch Corporation, a company that recently spent
$10,000 to develop a statistical software package. To date, you only have one client. A recent
internal study revealed that this clients demand for your software is Qd= 100 - 0.1P and that it
would cost you $500 per unit to install and maintain software at this clients site. The CEO of

your company recently asked you to construct a report that compares (1) the profit that results
from charging this client a single per-unit price with (2) the profit that results from charging $900
for the first 10 units and $700 for each additional unit of software purchased. Construct this
report, including in it a recommendation that would result in even higher profits.
Answer:
With a simple per-unit pricing strategy, the optimal per-unit price is determined by MR = MC.
Here, the inverse demand function is P = 1,500 5Q, so MR = 1,500 10Q.
Also, MC = $1000 and fixed costs are $15,000.
Equating MR and MC yields 1,500 10Q = 1,000. Solving, Q = 50 and P = 1,500 5(50) =
$1,250.
Profits at this price are ($1,250 - $1,000)*(50) $15,000 = -$2,500.
Under the second-degree price discrimination strategy, 10 units (computed as 300 0.2*($1,450)
= 10) are purchased at $1,450 and an additional 45 units are purchased at a price of $1,225 (total
quantity demanded at a price of $1,225 is 55 units, but 10 of these will be sold at $1,450).
Profits from the second-degree price discrimination scheme are:
($1,450 $1000)*(10) + ($1,225 $1000)(45) $15,000 = -$375.
A profitable and feasible recommendation would be two-part pricing. Under this proposal, the
client would pay a fixed license fee plus a per-unit fee for each unit of the software installed and
maintained.
The optimal two-part price sets the per-unit fee at $1000 per unit (marginal cost). At this price,
the client will purchase 100 units of the software. The optimal fixed fee is $25,000 (computed as
(.5)*($1500 - $1000)*(100) = $25,000).
Profits under two-part pricing are $25,000 - $15,000 = $10,000.