. Provide solutions to the following economic questions.
Chapter 8 Pricing strategies This chapter teaches of different pricing strategies for your products or services and shows how these can sometimes be set based on industry norms. Discussions of customer credit options are also discussed with the advantages and disadvantages of offering these. Pricing positions the product or service. Pricing strategy should match firm strategy. Following a logical process can lead to better pricing. A. Value pricing-offering more for less. B. Prestige pricing-setting a high price to convey high quality or uniqueness. C. Cost-plus pricing-applying a factor to calculated costs. D. Penetration pricing-charging lower initial prices to capture market share. E. Skimming pricing-charging higher initial prices. F. Meet-or-beat-the-competition pricing-just what it says. G. Follow-the-leader pricing-using a competitor as a model for your pricing. H. Personalized (dynamic) pricing-charging different prices as the market will bear. Variable Pricing - provides different prices for a single product or service. Price lining-setting a range of pricing levels. Questions :. Discuss the pros and cons of the following pricing strategies-value pricing, keystoning, cost-plus, penetration strategy, skimming strategy, and meet or beat the competition-for each of your businesses. Present your recommendations for each other to the class. 2. What is the relationship between price and company image? Why is it important? a. What is "penetration" pricing? Can you think of an example of a company that has used penetration pricing to introduce a new product? What firm is it and what is the example? .. What is the relationship between pricing and competition?Problem 3 [24 marks] A competitive firm uses two inputs, capital (k) and labour (), to produce one output, ()). The price of capital, WA, is $1 per unit and the price of labor, w, is $1 per unit. The firm operates in competitive markets for outputs and inputs, so takes the prices as given. The production function is f (k, [) = 340.2510.25. The maximum amount of output produced for a given amount of inputs is y = f (k, !) units. a) Use the method of Lagrange to find the conditional factor demands for cost minimization. [8 marks] b) Find the firm's cost function. [2 marks] c) Would you call this a short-run cost function or a long-run cost function? Explain why. [1 mark] d) Write the equations for the firm's average cost function and marginal cost function. [2 marks] e) Draw the firm's total cost function, average cost function, and marginal cost function on a diagram. Clearly label the axes, the curves, and any key points on the graph (eg., axis intercepts, curve intersections, and minimums) with the numbers specifying the exact prices and quantities at these points. What are the coordinates of the points where the average cost curve and marginal cost curve intersect with the total cost curve? [6 marks] () Does your graph indicate increasing, decreasing, or constant returns to scale? Explain. [1 mark] Hint: Think about the relationship between the total cost function and returns to scale. g) Show the firm's long-run supply function on your diagram and write a supply function for the firm. [2 marks] h) Using your supply function, find the profit maximising quantity if the price of output P = 4. What price would be needed for the firm to supply 18 units of output? [2 marks]1. Consider a household that lives two periods and consumes CI in period 1 and 02 in period 2. The household earns a wage W in period one and can save A which yields (1 + r}A in period 2 where r is the net interest rate. The household does not inherit any nancial assets and does not have labor income in period 2. The household chooses consumption in period one and two (01, 02) and savings A in period 1 to maximise the present discounted utilities \"(6\"517 Ulcil + U(Cg) subject to the budget constraints in period 1 and 2. Assume that utility function has the constant relative risk aversion (UREA) form: 01-1 1 U(0)= 17 Note: IV 32> 0,?\" 2 0,7 :> 0, ,6 > 0 are parameters and known in this framework For example, W = $90,000, 1" = 10%, '7 = 2,13 = 1. (a) Show that the utility function satises all the assumptions that you learned in class: (i) increasing in C; and (ii) diminishing marginal utility. (h) Write the budget constraint for period 1 and period 2. Derive the lifetime budget constraint. (c) Write the optmization using the Lagrangian method and derive the FOCs. (d) Write the optimality condition for household savings (or Euler equation). Interpret the condition in words. {e} Dene the intertemporal elasticity of substitution (IE3) cr = My. Find the optimal consumption profile, denoted by (Cf, 0;) , as function of no, :3 and l- . {1'} Compute the elasticity of Of and 02* with respect to the rst period wage W, or percentage changes in period1's and period-2's consumption when the wage increases by 1 percent. Mathematically, the elasticity is dened as most?) - _ W for 3 1,2 {g} Describe the effect of an increase in ,8 on the optimal consumption prole (Cf, 0;). Provide economic intuition. (h) Describe the effect of an increase in the interest rate r on C; and 02*. Does rst-period consumption increase or decrease in reaponse to an increase in r? 14:06 8/16: MI
