Economic Assignments
Q1
The following willingness to pay are for options for a new car by 3 potential customers:
Customer GPS System Sunroof
A $1,200 $700
B $1000 $500
C $300 $1000
For simplicity, assume the firm’s costs are zero.
A-If the manager knows the willingness to pay and identity of each consumer, what is the optimal strategy? How much profits will be made and what is the consumer surplus?
B-Suppose the manager does not know the identities of the consumer and the manager sells GPS Systems for $1000 each, sunroofs for $1000 each but offers a special option package (GPS System plus sunroof) for $1400.
C- Which customers will buy the individual options for $1000 each and which customers will buy the special option package for $1400? Why?
D- Given your answer above, how much profits will be made and what is consumer surplus?
Q2
The profits of the four major networks (CBS, NBC, ABC and Fox) depend significantly on the ratings of its prime time shows. The higher the ratings, the higher the price the network can charge for advertising and the higher the profits of the network. To keep things simple, we will focus on two networks, CBS and NBC, and two of the prime time spots, 8-9PM and 9-10PM.
Each network needs to decide which time slot to place its hit show, 8-9PM or 9-10PM, at the same time. The other time slot will be filled by a run of the mill show.
The following payoff matrix shows the total number of viewers (in millions) if each network places its hit show in each of the time slots:
CBS
8-9PM time slot
9-10PM time slot
8-9PM time slot
62,72
60,75
NBC
9-10PM time slot
50,60
61,66
A-If you are the program manager for CBS, what time slot would you place your hit TV show (assuming that your goal is to maximize the number of viewers)? Please explain why.
B- If you are the program manager for NBC, what time slot would you place your hit TV show (assuming that your goal is to maximize the number of viewers)? Please explain why.
C-Using the payoff matrix above, is there an incentive for NBC and CBS to collude and agree to put their hit shows in different time slots? Explain your answer.
Now suppose the payoff matrix for NBC in the 9-10PM time slot was changed from 61 to 55, as shown below:
CBS
8-9PM time slot
9-10PM time slot
8-9PM time slot
62,72
60, 75
NBC
9-10PM time slot
50,60
55,66
D-Would your answer to a), b) and c) above change? Please explain your answer.
Q3
You own a restaurant called the “The Good Bite” and are about to open a new restaurant which is taking up a lot of your time and energy.
At “The Good Bite “restaurant:
You pay your dishwasher an hourly wage of $15 per hour.
Your waiters, waitresses and bartenders are paid a salary of $5.00 per hour and receive most of their compensation in terms of tips.
You recently hired a manager who receives a $50,000 salary plus 2% of the profits of the restaurant.
Your grandmother asks you:
A-why do you pay your dishwasher an hourly wage instead of by the number of dishes washed?
B-why do you pay your waiters and bartenders mainly via tips instead of a straight salary?
C-why do you pay your manager a % of profits instead of just a straight salary?”
D-How do you answer your grandmother? Explain
Q4
The Atlanta Journal Constitution once reported on online dating services, noting that the fees were $500 for men and $400 for women. The owner of one of the dating services said that the difference in fees was to compensate for inequalities in pay between men and women.
A-Can you suggest any alternative reasons for this difference? Explain.
B-Is this pricing scheme consistent with the assumption that firms attempt to maximize profits? Why or why not.
Q5
Eastern Airlines needs 5 baggage handlers every Sunday morning at 6am for an early flight to Las Vegas. In order to avoid paying overtime to its employees, to save on costs and to increase profits, the manager of Eastern Airlines is thinking about getting 5 baggage handlers from Jim’s Temporary Employment Agency each week at a cost of $20 per hour, significantly below the cost of Eastern Airline’s own baggage handlers on overtime.
Should the manager of Eastern Airlines acquire the 5 baggage handlers from Jim’s Temporary Employment Agency? Under what circumstances? Explain why or why not.
