Managerial Economics

1. Nike pricing decisions:

a. If demand for Nike running shoes is elastic and Nike wishes to increase firm revenue, should Nike raise or lower price of running shoes? Justify your answer.

If demand is elastic, following a decrease in price, the quatity demanded increases more than proportionately and revenue increases. thus, price should be lower.

b. If demand for Nike running shoes is elastic and Nike wishes to increase firm profit, what information should Nike weigh to determine if it should raise or lower the price of running shoes?

In this case, the cost of production is needed to decide whether they should lower price or not.

If

Price*(1-1/absolute elasticity of demand)>Marginal cost, they should lower price, otherwise, price should be increased.

2. As a budding entrepreneur, you have purchased a small bagel shop. You have engaged in a market study to categorize your customers' willingness to pay for a meal (coffee+bagel) into 8 equal sized groups: ($5.00, $4.50, $4.00, $3.50, $3.00, $2.50, $2.00, $1.50). All of your costs are fixed except labor and materials, which cost $2.25 per meal sold. **Hint: If it is helpful to you in thinking through the problem, pick a group size (such as 100 customers per group) to help you construct a demand schedule.

a. What price should you charge for a meal?

In this case, assuming 100 consumers per group, we have,

price total sales revenue marginal revenuemarginal cost

5 100 500

4.5 200 900 4 2.25

4 300 1200 3 2.25

3.5 400 1400 2 2.25

2.5 500 1250 -1.5 2.25

2 600 1200 -0.5 2.25

1.5 700 1050 -1.5 2.25

At equilibrium, we must have,

MR=MC

Thus, $4 per meal should be charged.

b. Suppose your market research tells you that the four lowest value groups are all students. Should you offer a student discount? If so, how much?

In this case, discount can be given till the price equals with marginal cost. Thus, required discount = (4.00-2.25)=1.75

3. The Burrito Barn is considering a price reduction on the Firegut Burrito, which currently sells for the price of $5.00. Giuseppe, the proprietor of Burrito Barn, has recorded sales data from some recent price changes. He is quite confident that no other demand factors, such as consumer income or competitor pricing, have significantly changed during this time period.

Price per Burrito Weekly Sales

$6.00 400

$5.50 420

$5.00 450

$4.50 520

a. Calculate the price elasticity of demand for burritos, between $5.00 and $5.50 (using the elasticity estimator formula). In this price range, are burritos price elastic, inelastic or unit elastic?

Price elasticity =(change in quantity demanded/initial quantity demanded)*(initial price/change in price)

=((420-450)/450)*(5.00/.50))= -0.666666667

As absolute value of elasticity <1, demand is inelastic.

b. Calculate the price elasticity of demand for burritos, between $4.50 and $5.00 (using the elasticity estimator formula). In this price range, are burritos price elastic, inelastic or unit elastic?

Elasticity =((450-520)/520)*(4.50/.5)= -1.211538462

As absolute value of elasticity>1, demand is elastic.

c. Why do you think the elasticity estimate would change in this way?

In case of a linear demand curve DD'

Elasticity of demand at E=ED'/DE

thus, the elasticity estimate will change depending on the position of point E, i.e, the price quantity combination.

d. If the current price is $5.00 and the owner is considering a price reduction of 5 percent, what can you project for a percent change in weekly burrito demand (using your elasticity information)?

Here, at price =$5, d3emand is inelastic. Thus, following the decrease in price, the quantity demanded will increase less than proportionately.

4. A company currently sells 1,000 units a year at $25 per unit. The marginal cost of each unit is $12. The company is considering lowering the price by 4%. The company believes that this price discount will increase its economic profits. It has also estimated that, at its current sales level, if price is increased by 1% then the quantity of units demanded by customers will drop 1.22%. You are a member of the marketing department that is making a final decision on this 4% price discount. Utilizing stay-even analysis, state whether you support this price discount and your reasoning for this position.

Here, total revenue e= 25*1000=25000

Total variable cost =12*1000=12000

Economic profit =13000

Elasticity of demand = -1,22/1=-1.22

Following a 4% decrease in price, increase in quantity demanded= 4.88%

New quantity demanded=(1000+(1000*.0488))= 1048.8

Total profit = (1048.8*(25-(.04*25))-(12*1048.8)= 12585.6

As profit is lowering in this case, the discount should not be given.

You and a competitor are both considering the launch of a new product line, which could be made of either plastic or glass. The table below depicts resulting profits (in millions of dollars).

a. Does either firm have a dominant strategy?

No, none has any dominant strategy.

b. What, if any, are the Nash equilibria in this game?

Here, if both uses plastic, both has incentive to use glasses

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