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ECON625 Davenport University Special Pricing Practices Problems

ECON625 Davenport University Special Pricing Practices Problems

Question Description

  1. An amusement park, whose customer set is made up of two markets, adult and children, has developed demand schedules as follows:

Price ($)

Quantity, Adults

Quantity, Children

5

15

20

6

14

18

7

13

16

8

12

14

9

11

12

10

10

10

11

9

8

12

8

6

13

7

4

14

6

2

The marginal operating cost of each unit of quantity is $5. (Hint: Because marginal cost is a constant, so is average variable cost. Ignore fixed cost.) The owners of the amusement park want to maximize profits.

  1. Calculate the price, quantity, and profit for each segment if the amusement park charges a different price in each market. (Hint: calculate profit at each price in the adult market, then in the child market, and choose profit maximizing in each. Using a spreadsheet would make this task manageable.)

Adult market price (in dollars):

Adult market quantity:

Adult market profit (in dollars):

Child market price (in dollars):

Child market quantity:

Child market profit (in dollars):

Total profit (adult + child, in dollars):

  1. Calculate the price, quantity, and profit if the amusement park charges the same price in the two markets combined. (Hint: Add adult and child quantities together, and treat this total and the entire market quantity at each price.)

Market price (in dollars):

Quantity (child + adult at this price):

Profit:

  1. Is profit higher, lower, or the same when the market is split with different prices for adults and for children?
  1. Consider a small town that is served by two grocery stores, White and Gray. Each store must decide whether it will remain open on Sunday or whether it will close on that day. Monthly payoffs for each strategy pair are as shown in the table below.

  1. Which firm is the most profitable in this market?
  2. Does Gray have a dominant strategy?
  3. Is there a dominant equilibrium for both firms?
  4. Is the dominant equilibrium profit-maximizing?
  5. Is this an example of the prisoner’s’ dilemma? Explain.

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