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Indirect Price Discrimination, More Realistic and Complex Pricing

12-1 Parking Lot Optimization (More Realistic and Complex Pricing)
Suppose your elasticity of demand for your parking lot spaces is -2, and price is $8 per day. If your marginal cost is zero, and your capacity is 80% full at 9 A.M. over the last month, are you optimizing?

14-4 Microwave Ovens (Indirect Price Discrimination)
A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto-defrost feature. Female shoppers generally value microwaves more than men and attribute greater value to the auto-defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $70 and one with auto-defrost at $80 while women value a simple microwave at $80 and one with auto-defrost at $150.
If there is an equal number of men and women, what pricing strategy will yield the greatest revenue? What if women compromise the bulk of microwave shoppers?

14-6 Bundling (Indirect Price Discrimination)
At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price discriminate).

(Students with Early Classes) (Students without Early Classes)
Coffee 70 60
Banana 50 100

The marginal cost of coffee is $10. The marginal cost of a banana is $40. Is bundling more profitable than selling separately? If so, what price should be charged for the bundle?

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Solution Preview

Because the elasticity of demand = -2, which is smaller than -1, the demand is inelastic and revenue can only rise if we decrease prices. Since there are still 20% of parking spaces not filled, we can lower the price to a point that will attract 20% more people to park at the lot. ε = (dq / q) / (dp / p), so (dp / p) = (dq / q) / ε = (0.2 / -2) = -0.1, meaning that the price needs to decrease by 10% to fill the lot to capacity. By lowering the price from the ...

Solution Summary

Microeconomics questions on pricing, elasticity of demand, price discrimination, and bundling.