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price adjustment policy

1. Clothing stores affiliated with The Gap, Inc, offer a 14-day "price adjustment" policy: for example, if you purchase a shirt for $80 and it is subsequently marked down to $55, you can bring your receipt back to the store and receive a $25 refund within 14 days of your original purchase. What would stores voluntarily limit their ability to price discriminate - are they failing to engage in profit maximizing behaviors? Brieft explain

2. J. Cigliano ("Price and income Elasticities for Airline Travel: The North Atlantic Market," Business Economics, September 980) estimated the price elasticity of demand for regular (full-fare) travel in coach class in the North Atlantic Market to be c_b=-1.3. He also found the price elasticity of demand for excursion (vacation) travel to be about e_v=-1.8. Suppose Transatlantic Airlines faces these price elasticity of demand, and that the elasticities are constant, that is, they do not vary with price. Since both the coach fares, you may also assume that the marginal cost of service is about the same for business and vacation travelers. Suppose an airline facing these demand elasticities want to set P-r (the price of a round-trip ticket to regular business travelers) and P_v (the price of the round-trip ticket to vacation travelers) to maximize profit. What prices should the firm charge if the marginal cost of a round trip is $200.

Solution Summary

Effects of the price adjustment policy are presented.