Practical Asset Pricing ECM 152

Class 6
Fabio Calonaci
Semester C, 2023

1. Solution:
Cross elasticity of demand = % change in quantity demanded of A % change in price
of B = 12% 15% = 0.67
Since the cross elasticity of demand is positive, product A and B are substitute goods.
They are apples and oranges

2. Solution:
Percentage increase in price of cigarettes
= (600-200) / [(600+200) / 2]
= 100%

Percentage increase in quantity demanded of marijuana

= (800-2,000) / [(800+2000) / 2]
= -85.71%

Cross elasticity of demand

= % change in quantity demanded % change in price
= -85.71% / 100%
= -0.86

Cigarettes and marijuana have negative cross elasticity of demand which tells that
they are complimentary goods.

The policy has proved effective because cigarettes and marijuana are consumed to-
gether. Increase in price of cigarettes increased the price of the whole bundle and
reduced the purchasing power of people and resulted in a decrease in consumption of
marijuana.

3. Solution:

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4. Solution:

• Price optimization refers to the use of mathematical analysis to determine

how customers will respond to different prices for its products and services
through different channels

• It is also used to determine the prices that the company determines will best
meet its objectives such as maximizing operating profit

• The data used in price optimization can include survey data, operating costs,
inventories, and historic prices & sales

• Price optimization practice has been implemented in industries including retail,

banking, airlines, hotels and insurance among the others
• One optimal use for IT pricing software systems is when there is an externality
problem

• A good example is road congestion pricing, where a city prices roads higher
during peak hours to deter drivers from driving then

• This is also the case for water parks, theme parks and so on

• These are examples of goods that have a very high fixed capacity and highly
variable demand, leading to congestion at certain times that they need to man-
age

5. Solution:

• Capacity Management is a process that seeks to meet business demands via

an approach that ensures infrastructure is the right size to meet present and
future goals

• Capacity Planning defines the process by which an organization can establish

current and future processing needs

- Planning is a prominent piece of the capacity management puzzle

- The important thing about capacity planning is that infrastructure is flex-
ible to meet changing demands

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