Answer the following:

1.

Suppose the elasticity of demand for your parking lot spaces, which are located in a downtown business district, is -1.8, and the price of parking is $7 per day. Additionally, suppose that your MC is zero, and your capacity has been 80% full at 9 AM each day over the last month.

Since demand is(elastic/unit elastic/inelastic)________ and the lot is below capacity, (decreasing price/leaving the price unchanged/increasing price)________ is the optimal pricing strategy.

2.

Consider Cowboys Stadium, a large football stadium that can seat approximately 80,000 people (and hold over 100,000 people), located in Arlington, Texas.If the Super Bowl, the game that determines pro football's champion team for the year, is played in Cowboys Stadium, the quantity of parking spots demanded will far exceed capacity. On a typical game day in the regular season, the quantity of parking spots demanded will only slightly exceed capacity. For smaller events, less than half of the parking spots are typically filled. Assume the marginal cost of providing another parking spot, once the parking lot has already been built, is $0 up to capacity.

In the following table, match each event to the most likely pricing strategy per parking spot.

Pricing Strategy	Regular Season Game	Super Bowl	Small Event
$1 per spot
$110 per spot
$65 per spot

3.

Some high-end retailers place their most expensive products right in the entryway of the store, where consumers will see them first, and place their more popular, better-selling items further back.

Which of the following would most likely be used by a behavioral economist as a justification for this strategy?

a. The store is using lower-priced options to drive down price expectations and make later, higher-priced options appear more expensive in comparison.

b. The store is using lower-priced options to drive up price expectations and make later, higher-priced options appear less expensive in comparison.

c. The store is using higher-priced options to drive up price expectations and make later, lower-priced options appear less expensive in comparison.

d. A behavioral economist would disagree with the store's strategy.

4.

When the Macintosh computer was introduced in 1984, Apple made it difficult for third-party software developers to develop software for the platform.

Following the rule for pricing commonly owned (substitutes/complements) ________, Apple priced both their software, as well as their computers, (above/below) ________ the stand-alone profit-maximizing price of each individually.

Concerts and recorded music were jointly priced (substitutes/complements) ________for musicians; now they are priced independently.

6.

In 2005, Clear Channel (an owner of multiple popular radio stations) spun off concert promoter Live Nation into an independent company. Assume that music radio stations and concerts are complements in consumption.

True or False: The price of radio programming should fall.

7.

Suppose Mattel, the producer of Barbie dolls and accessories (sold separately), has two types of consumers who purchase its dolls: low-value consumers and high-value consumers. Each of the low-value consumers tends to purchase one doll and one accessory, with a total willingness to pay of $40. Each of the high-value consumers buys one doll and two accessories and is willing to pay $77 in total.Mattel is currently considering two pricing strategies:

	Strategy 1: Sell each doll for $20 and each accessory for $20
	Strategy 2: Sell each doll for $3 and each accessory for $37

In the following table, indicate the revenue for a low-value and a high-value customer under strategy 1 and strategy 2. Then, assuming each strategy is applied to one low-value and one high-value customer, indicate the total revenue for each strategy.

	Revenue from Low-Value Customers	Revenue from High-Value Customers	Total Revenue from Strategy
$40 Value, 1 Accessory	$77 Value, 2 Accessories	($)
($)	($)
Strategy 1
$20 doll + $20 accessory	$	$	$
Strategy 2
$3 doll + $37 accessory	$	$	$

The strategy that generates the most revenue is strategy (1/2) ________

8.

A local Pilates studio recently began offering a monthly subscription service for its patrons.Suppose a particular patron at this studio has the following willingness-to-pay schedule, per session.

Session	Willingness to Pay
1st	$70
2nd	$60
3rd	$50
4th	$40
5th	$30
6th	$20

Suppose this consumer would not demand any more sessions, even for free. Also assume that the marginal cost to the studio, per session, is constant at $10.

At a price of $65.00 per session, the number of sessions demanded by this consumer would be ________. At this price and quantity, consumer surplus is $ ________ and producer surplus is $ ________.

Suppose the studio has devised a new pricing scheme for consumers who demand more than 1 session. This pricing scheme is a subscription service, whereby consumers can pay a flat fee of $216.00 and can have up to 6 sessions total.

Using this subscription pricing model, this consumer would demand (2/3/4/5/6) ________ sessions. Under this scenario, consumer surplus is $ ________ and producer surplus is $________. (Hint: For consumer surplus, consider how much total value the consumer places on all sessions, versus the total price paid.)

9.

Your family business uses a secret recipe to produce salsa and distributes it through both smaller specialty stores and chain supermarkets. The chain supermarkets have been demanding sizable discounts, but you do not want to drop your prices to the specialty stores.

True or False: In order to offer a lower price while defending yourself against antitrust lawsuits, you could simply offer a lower price to the chain stores but not the smaller stores.

10.

A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto-defrost feature. Female shoppers generally value microwaves more than men do and attribute greater value to the auto-defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $66 and one with auto-defrost at $81, while women value a simple microwave at $81 and one with auto-defrost at $147.Suppose the manufacturer is considering three pricing strategies:

1.	Market a single microwave, with auto-defrost, at $81, to both men and women.
2.	Market a single microwave, with auto-defrost, at $147, to only women.
3.	Market a simple microwave to men, at $66. Market a microwave, with auto-defrost, to women at $131.

For simplicity, assume there is only 1 man and 1 woman and that if the price of a microwave is equal to an individual's willingness to pay, the individual will purchase the microwave.

Use the following table to indicate the revenue from men, the revenue from women, and the total revenue from each strategy.

Strategy	Revenue from Men	Revenue from Women	Total Revenue from Strategy
1. Auto-Defrost Microwave only at $81	$	$	$
2. Auto-Defrost Microwave only at $147	$	$	$
3. Simple Microwave at $66, Auto-Defrost Microwave at $131	$	$	$

Suppose that, instead of one man and one woman, the market for this microwave consisted entirely of women. For simplicity, you can assume this means that there are two women, and no men.

Under these conditions, pricing strategy (1/2/3) ________ would maximize revenue for the manufacturer.

11.

The pricing model for iTunes has been to price songs individually. In contrast, Spotify opted to offer unlimited song playing for a monthly fee.

True or False: Spotify's pricing model will likely yield more profit if the value of the "bundle" of unlimited songs is more homogeneous across consumers than the values of the individual songs.

12.

At a student caf, there are equal numbers of two types of customers with the following values. The caf owner cannot distinguish between the two types of students because many students without early classes arrive early anyway (i.e., she cannot price-discriminate).

	Students with Early Classes	Students without Early Classes
Coffee	73	63
Banana	53	103

The marginal cost of coffee is 5 and the marginal cost of a banana is 20.The caf owner is considering three pricing strategies:

1.	Mixed bundling: Price bundle of coffee and a banana for 166, or just a coffee for 73.
2.	Price separately: Offer coffee at 63, price a banana at 103.
3.	Bundle only: Coffee and a banana for 126. Do not offer goods separately.

Assume that if the price of an item or bundle is no more than exactly equal to a student's willingness to pay, then the student will purchase the item or bundle.For simplicity, assume there is just one student with an early class, and one student without an early class.

Price Strategy	Revenue from Pricing Strategy	Cost from Pricing Strategy	Profit from Pricing Strategy
1. Mixed Bundling	$	$	$
2. Price Separately	$	$	$
3. Bundle Only	$	$	$

Pricing strategy (1/2/3) ________ yields the highest profit for the caf owner.