Kirsten Daniel Microeconomics For Management Group Homework ✓ Solved

Kirsten Daniel Microeconomics for Management Group Homework # . Amalgamated Popcorn, Inc. sells bags of flavored gourmet popcorn in a popular mall. As shop owner and operator, you have observed that weekly popcorn sales are well-described by the demand equation: Q = 1,P + 2.0A, where A denotes advertising weekly spending (in dollars). You are currently charging $1.50 per bag of popcorn (for which the marginal cost is $.75) and spending $500 per week on advertising. a) Compute the store’s price elasticity and advertising elasticity. b) Check whether your current $1.50 price is profit maximizing. If not, determine the store’s optimal quantity and price. c) Should the store consider increasing its advertising spending? Why or why not. 2. Recently, the major firms in the United States cigarette industry joined with the government in a settlement of liability claims. Under the tentative agreement, the industry would curb advertising and pay the equivalent of about $15 billion per year (for smoking-related state Medicaid expenses) in exchange for protection against smoker lawsuits. a) Before the settlement, a leading cigarette manufacturer estimated its marginal cost at $1.00 per pack and its elasticity of demand at -2. What is its optimal price? The firm’s share of the industry payment (based on its historic market share) will raise its average total cost per pack by $.60. What effect will this have on its optimal price? b) A marketing manager suggests that the firm should offer price discounts to the company’s long-term, older, most-loyal (addicted?) customers. Do you agree? Explain carefully. c) In the past, anti-smoking information campaigns have had some limited success in reducing smoking. What price reaction (if any) would the cigarette companies have to such programs? Explain carefully. 3. There are two competing Internet-based providers of medical information suitable for patients. ProPatient currently charges $150 per year to subscribers of its service, which helps patients learn more about their medical conditions. Its competitor, AskUs Health, currently charges $125 for a similar service. The current level of advertising by ProPatient is $2,500,000. ProPatient has tracked its volume of subscribers as a function of its price, the price of AskUs services, and of its own marketing expenditures designed to promote the service. The demand relationship is estimated as: QP = 120 - PP + 400 - PA + 0.02M where QP = quantity of subscribers, PP = price charged by ProPatient, PA = price charged by AskUs, and M = marketing expenditures by ProPatient. Fixed cost is $10,000,000 plus $5 per subscriber. a) What is the current quantity of subscriptions for ProPatient? b) Measure the cross-price elasticity of demand for ProPatient subscriptions with respect to the price of AskUs service under the current conditions. c) What is the price elasticity of demand for ProPatient under the current conditions? d) What is marginal revenue for ProPatient under the current conditions? e) What is the current level of profits for the company? f) Is ProPatient charging the optimal price? If not, what is the optimal price? 4. Intercontact INC. is a young company manufacturing highly sophisticated components used in telephony. Relevant data: incremental costs $75,000 per batch, fixed costs $30 million, price elasticity of demand -2. Current price is $120,000 per batch; last year's sales were 4,000 batches. a) Review the pricing model; is the firm setting the optimal price and output? b) What additional information is needed for a more complete analysis?

Sample Paper For Above instruction

The analysis of microeconomic decisions made by firms such as Amalgamated Popcorn, Inc., and the strategic considerations faced by industries like cigarettes, highlighted through the recent U.S. settlement, elucidate core principles of demand elasticity, profit maximization, and strategic pricing. These cases demonstrate the importance of understanding elasticity measures, optimal pricing strategies, and the impact of advertising and regulatory actions on firm behavior.

Case 1: Amalgamated Popcorn's Pricing and Advertising Strategy

Initial observations reveal that Amalgamated Popcorn's weekly demand can be expressed as Q = 1, P + 2.0A, where P is price, and A is advertising expenditure in dollars. Currently, the store charges $1.50 per bag, with weekly advertising spend of $500, and marginal cost at $0.75. To evaluate whether the current price is profit-maximizing, calculation of price elasticity is essential. Price elasticity (E_p) is measured as % change in quantity demanded over % change in price:

E_p = (dQ/dP) * (P/Q). Differentiating the demand equation yields dQ/dP = -1. Given current P of $1.50, and estimating Q at these levels, E_p can be calculated accordingly. The results typically show a demand elasticity magnitude greater than 1, suggesting elastic demand, meaning that a price decrease would increase total revenues. Advertising elasticity, which measures the responsiveness of demand to advertising spend, can be calculated similarly, considering A's effect on demand. The store's current profit maximization condition involves setting marginal revenue (MR) equal to marginal cost (MC). Due to the elastic demand, a lower price might increase revenues and profits, suggesting that the current setting might not be optimal. The store should consider adjusting pricing and advertising to maximize profits, possibly by marginal analysis involving derivatives of revenue and cost functions.

Case 2: Cigarette Industry's Settlement and Strategic Pricing

The U.S. cigarette industry, facing a significant liability settlement, has estimated demand elasticity at -2 and marginal costs around $1.00 per pack. The industry is expected to pay $15 billion annually, with individual firms' costs increased proportionally by share. The optimal price, given elasticity, is derived from the formula P = (E * MC) / (E + 1). With an elasticity of -2, the calculation yields an optimal price of about $2.00 per pack before considering additional costs due to payments. The industry costs increase by $0.60 per pack from the industry settlement, potentially raising the optimal price marginally. Pricing decisions must incorporate both marginal costs and the impact of demand elasticity, with the strategic goal of balancing revenue and market shares. Discount strategies targeted at loyal customers might be counterproductive if demand is elastic, as lowering prices could result in revenue loss during downturns caused by anti-smoking campaigns which tend to decrease demand, demanding companies to react by appropriate pricing adaptations.

Case 3: Internet-Based Medical Services and Demand Analysis

The demand relationship for ProPatient suggests that current subscriber levels depend on its price, competitors' prices, and marketing spend. Calculating the current quantity involves substituting current variables into the demand function. Cross-price elasticity determines how demand responds to competitors' price changes—valuable for strategic pricing. The price elasticity of demand, reflecting consumer responsiveness to price changes, guides revenue maximization. Marginal revenue can be derived from the demand function, and profit levels are calculated considering fixed costs, variable costs per subscriber, and revenues. If current prices do not maximize profits, calculating the optimal price involves equating marginal revenue to marginal cost and solving for price. This analysis aids in refining pricing strategies to increase profitability.

Case 4: Intercontact Inc.'s Pricing and Capacity Decisions

Intercontact operates in a highly elastic demand environment with a known price elasticity of -2. The current optimal price is derived from profit maximization conditions using elasticity formulas. The company must compare marginal revenue at current and potential prices, considering capacity constraints and variable costs. Additional data, such as detailed demand forecasts, competitor pricing strategies, and capacity expansion costs, are essential for a thorough analysis. These pieces of information facilitate decisions about whether to adjust prices, expand capacity, or hold current strategies to optimize profits.

Conclusion

Across these cases, the recurring theme is the critical role of demand elasticity in guiding pricing, advertising, and capacity decisions. Firms must carefully analyze their cost structures and demand sensitivities, applying economic theory to maximize profits while responding to regulatory and competitive pressures. Strategic adjustments, whether in pricing, advertising, or capacity planning, depend on a thorough understanding of these fundamentals, emphasizing the importance of precise demand elasticity measurements and cost analysis in effective managerial decision-making.

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