1) A firm with pricing power (i.e. a price-maker) estimates that the elasticity of demand for its product is -2.5. To maximize profits by what percentage above cost should it mark up its price? (Show your work). (Note for clarity: If, for example, it should charge a price at 125% of marginal cost, then it means it is marking up price 25% above cost.)

2)You are a profit-maximizing firm. Suppose you face two types of customers, Coat-Lovers type (50%) and Easy-Going type (50%). These customers shop in your specialty clothing store. Consumers of Coat-Lovers are willing to pay $100 for a coat and $40 for a pair of pants. Consumers of Easy-Going are willing to pay $80 for a coat and $70 for a pair of pants. For simplicity let's assume that there are only two customers in this market and that total fixed costs equal zero to produce either goods.

Your firm faces no competition but bears the cost of making the clothes: $25 per coat and $20 per pair of pants (i.e. MC of making coat = $25 and MC of making pants = $20). You do not have the power to price discriminate. You offer the same prices to all your customers.

2a. Suppose you post a price for a coat and a price for pants. Knowing the customers' reservation price (willingness to pay) for each product, what is the profit-maximizing price for coat and for pants that the firm should charge?

2b. Suppose instead that you only offer a bundle of one coat and one pair of pants (which we would call a suit.) What is the profit-maximizing price to charge for the suit? Compare the profit that the firm makes in 2b (bundling) vs. 2a (non-bundling)!

3)Two competing firms in an oligopoly market, Red and Blue, need to decide which product they want to introduce in the market, which is either Big or Small. Consider this is a single-shot simultaneous play game. The table below shows the profits each firm will make for producing either Big or Small. As seen, how much profit each firm makes is conditional upon which product the other firm makes.