Managerial Economics

Activity Instructions
Read the following scenarios and complete the corresponding questions. Answer in complete and grammatically correct sentences.  I am looking for your thought process in the answers to the questions, so be complete in your answers and demonstrate your knowledge.

Scenario 1 (length: as needed)
Suppose the market for a certain pharmaceutical drug consists of domestic (United States) consumers and foreign consumers. The drug’s marginal cost is constant at $5 per dose. The demand schedules for both regions are given below. 

	US	Foreign
Price	Quantity	Quantity
$60	1,000	200
55	1,500	250
50	2,500	400
45	4,000	600
40	8,000	1,000
35	14,000	2,000
30	20,000	3,500
25	30,000	7,000
20	40,000	16,000
15	55,000	35,000
10	65,000	75,000
5	77,000	150,000

1. Assuming the markets cannot be separated (and thus the same price must be charged to both regions), what is the marginal revenue for the quantities that you can determine?  What price should be charged to maximize profit?
2. If the markets can be separated, determine the marginal revenues in each market. If the firm must set a single price for the drug in each market (the prices can vary between markets), what price should be charged in the foreign market? In the domestic market?  What happens to the company’s profit?

Scenario 2 (length: as needed)
Apple (relatively) recently introduced different “versions” of the iPhone and iPad—in particular, currently Apple sells four versions of the iPad (iPad Air, iPad with Retina display, iPad mini with Retina display, and the iPad mini– http://www.apple.com/ipad/compare/). Note that the “top of the line” iPad and iPad mini are available with hard drives that range from 16GB to 128GB, and with the A7 chip. The other versions of the iPad and iPad mini are only available with a 16GB hard drive and feature slower chips (A6X and A5), but at a lower price than the top of the line models.

1. Briefly explain why continuing to sell the older models when the newer generation’s models are introduced is an example of price discrimination. How does this help Apple reach a larger market? 
2. Why are the lower tier models are currently only available with the 16GB hard drive, when previously (when they were the top of the line models) they were available with larger hard drives?
3. When the iPad mini was first introduced, industry experts estimated that for every 4 million iPad minis that were sold, sales of the full-sized iPad would decrease by 1 million units. Assuming that is the case, explain why introducing the iPad mini was a good idea, even with some level of cannibalization.

Scenario 3 (length: as needed)
The marginal cost of producing a particular item is $2.50. Suppose a consumer is willing to purchase one item at $10, a second unit of that item at $9, a third unit of that item at $8, and so on. This means that the consumer’s demand schedule looks like:

Price	Quantity
$10	1
9	2
8	3
7	4
6	5
5	6
4	7
3	8
2	9
1	10

1. If the firm must set a single price and sell all of its units, what price will it select to maximize profits? What will the profit be?
   1. Suppose the firm can apply a ‘volume discount’, pricing the first good at $10, pricing the second unit at $9, and pricing the third unit at $8, and so on. What is the smallest per-unit price the firm will want to offer? Assuming the volume discount ends at (or before) that price, what will the firm’s profit be?

Scenario 4 (length: as needed)
You are in charge of setting the optimal price for tickets for a local hockey team.  The demand schedule for hockey tickets is below:

Price	Quantity
$10	6,000
11	5,900
12	5,750
13	5,500
14	5,200
15	4,900
16	4,500
17	4,000
18	3,500

1. What price maximizes the revenue from tickets? (Note, since marginal costs are assumed to be zero, this also maximizes profits)
   1. Each spectator also spends money parking and on concessions. The team owns both the nearby lots and the concession stands at the arena. The team has estimated that concession profits increase by $5 per person, and for every four spectators, one parking permit that is priced at $10 is purchased. With these new sources of revenue, what is the optimal ticket price?

Writing Requirements

Length: as indicated (Show your calculations where appropriate.)

1-inch margins

Double spaced

12-point Times New Roman font

This activity will be graded based on thoroughness and correctness of responses. For the numerical and graphical questions, to achieve full marks you must also show your work.

Master the basic techniques of microeconomic analysis such as demand, supply and equilibrium; production and cost theory; and market structure and pricing.

Apply economic reasoning to understand and improve managerial decision-making and grasp the analytical foundations underlying a firm’s competitive strategy.

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