PDQ has the beach-side concession for selling ice cream in Tyrico Bay, Trinidad. It can make two types of ice cream, which it labels Deluxe and Super Deluxe. It costs PDQ 2.00 to make a serving of Deluxe ice cream and 2.50 to make a serving of Super Deluxe.

Each day, PDQ has n potential customers, where n is a number that varies randomly from day to day, depending mainly on the weather. PDQ has determined that there are two types of customers, ice cream fanatics and regular customers. Although the number of customers varies, on any given day 50% of them are fanatics and 50% are regular. The customers have the following valuations, or willingness to pay, for the two types of ice cream:

Deluxe Super Deluxe

Fanatics 5.50. 8.00

Regular 4.00. 4.50

Note that Fanatics are willing to pay 8.00-5.50=2.50 to upgrade from Deluxe to Super Deluxe, while Regulars are willing to pay 4.50-4.00=0.50 to upgrade from Deluxe to Super Deluxe.

(Assume that if customers are indifferent between buying and not buying, they buy; if they are indifferent between buying a Deluxe and a Super Deluxe, they buy the Super Deluxe.)

Question 23

Suppose PDQ sells only Deluxe ice cream. How much should it charge?

Question 24

Suppose PDQ sells only Super Deluxe ice cream. How much should it charge?

Question 25

If PDQ sells both Deluxe ice cream and Super Deluxe ice cream, how much should it charge for Deluxe ice cream?

Question 26

If PDQ sells both Deluxe ice cream and Super Deluxe ice cream, how much should it charge for Super Deluxe ice cream?

Question 27

What should PDQ do?

a. Sell only Deluxe ice cream

b. Sell only Super Deluxe ice cream

c. Sell both Deluxe and Super Deluxe ice cream

Question 28

When Michelin lowers the price of its premium tire by 1%, demand rises by 3%. This means that Michelin's elasticity of demand is _ _ _ _ and the demand for Michelin's tires is _ _ _ _ _:

a. (1/3), elastic.

b. (1/3), inelastic.

c. 3, elastic.

d. 3, inelastic.