Answered: A machine manufacturer sells high…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

1. A machine manufacturer sells high precision milling equipments. It sells the machine as
well as the maintenance services. Users of milling machines from competitors were also
potential sources of maintenance business. Based on a survey, customers were clustered
into four segments of different size as shown below. Their willingness to pay for the
machine and the maintenance service is also given in the table. The marginal cost to the
firm for the machine and the maintenance services is respectively, $550 and $470, and
there is no cost saving from bundling.

segment Segment Size WTP for Machine WTP for maintenance
1 12 $1,250 $990
2 23 $1,450 $480
3 22 $1,180 $1,040
4 43 $1,390 $870

a. If the company uses component pricing, what are the optimal prices and the
resulting profits for each item?

b. If the company uses pure bundling, what are the optimal price and the resulting
profit for the bundle? Between pure bundling and component pricing, which one
is better for the company? Why?

c. If the company uses mixed bundling, what are the optimal prices and the resulting
profits for the bundle as well as each item?

2. THE MUSICAL company runs a broad-way musical. Its forecast of the demand of the
show is 100 people on weekdays but 200 people on weekends. However, its theater has
only 150 seats. The musical fans are usually willing to pay $200 for the show when they
are in the mood for the show but they are willing to pay only $100 when they are not. One
market research shows that on any given day, a musical fan is in the mood for the show in
70% of the time. Now, the company is considering advance selling its musical tickets.
(There is no variable cost that changes with the size of audience. So you can ignore the
cost in this calculation.)

a. For weekday shows, should it spot sell or advance sell? What are the optimal
price and the resulting profit in this case?

b. For weekend shows, if the company spot sells all its tickets, what are the optimal
price and profit? If the company advance sells all its tickets, what are the optimal
price and profit? Which scheme produces a better profit? Why?

c. For weekend shows, if the company advance sells 34 tickets but spot sells the rest,
what is the incremental profit of the company from this new scheme (compared to
the previous two schemes in question b)? Why did limiting the number of advance
tickets lead to a better profit?

3. An online retailer called Swimoutlet.com is selling women’s swimsuits with two different
colors – red and blue. Its market research shows that there are three different consumer
segments (of the same size): the first segment valuing the red one at $0 and the blue one
at $7, the second valuing them respectively at $7 and $0, and the third with valuations $3
and $4. The retailer is considering using the probabilistic selling scheme.

a. How much should the retailer charge for its products under the traditional selling?
What is its profit in this case?

b. If it introduces the probabilistic selling, how much should it charge for each
product (including the probabilistic good)? What is the incremental profit of this
retailer from this new scheme (compared to traditional selling)? (Assume that the
firm uses the assignment probability of 50% on both products.) Why does
probabilistic selling improve profits?

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