Mbaa 523 Problem Set 6 Key Revised Chevrolet Offers Five

Mbaa 523 Problem Set 6 Keyrevised 12151 Chevrolet Offers Five Cars

Mbaa 523 Problem Set 6 Keyrevised 12151 Chevrolet offers five cars: the Spark, Sonic, Cruze, Malibu, and Impala with suggested retail prices of $12,270; $14,245; $16,170; $22,565, and $27,060 respectively. Is this price discrimination? Explain why or why not. 2. You sell consumer products in the Americas. The price sensitivity of South American consumers seems greater than for those in North America. An economic consulting firm has estimated the own-price elasticity for your most profitable product is -1.25 in North America and -1.50 in South America. Your marginal cost is constant at $75 across most of your production volume capability. What prices will maximize profits? Show the computation. 3. Define the 3 types of price discrimination. Provide an example of 1st degree discrimination and explain why it is difficult to practice. 4. You are a pricing analyst at a global network airline. Using historical data, you have determined that the demand for coach seats for passengers traveling for business and those traveling for leisure are: 1) business demand: P = 200 – 3Q, and 2) leisure demand: P = 120 – 0.6Q. The marginal cost for a passenger in coach class is $20. What price should you set for each type of passenger and how many seats should be sold to each? Show the computations. 5. Complete and label the diagram showing the numbers of seats sold and price for leisure and business passengers. Answer the following questions: a. If MC increases modestly, will fares increase? b. Are all seats sold? If not, wouldn’t the airline make more money by selling more seats at a lower price? c. What recommendation would you make for the fleet assignment to this route? 6. Explain the conditions necessary for a firm to practice 3rd degree price discrimination. How do airlines meet each of these conditions? 7. What benefits, if any, do business and leisure passengers obtain from price discrimination? 8. Wal-Mart offers to match the price of any competitor. Why is this guarantee not necessarily a benefit to consumers? Db DL P P MC Select one of the two questions from the discussion questions listed below. Discussion Question 1 CF is a sixty-year-old African American male who presents as a new patient for initial evaluation and follow-up. He has been diagnosed with hypertension for the last twelve years and Type 2 diabetes for the same period of time. His current blood pressure is 162/90, with a pulse of 76. His body mass index (BMI) is 32. He is currently taking Maxzide 37.5/25 mg every morning. This is the only antihypertensive medication he has taken. For this question, focus on the treatment of hypertension. Discuss the influences of his age, gender, and ethnicity on hypertensive medications. On the basis of an analysis of those factors, provide one option for improvement of his blood pressure and provide a clear and specific justification for that choice. Be sure to include dosage and scheduling. Include highlights of patient teaching and/or recommendations for any lifestyle changes. Support your decisions with at least one reference to a published clinical guideline and one peer-reviewed publication. Discussion Question 2 MT is a fifty-six-year-old obese (BMI 31.5) Caucasian female with a significant family history of cardiovascular disease. She has uncontrolled hypertension and is currently taking metoprolol 50 mg twice daily. She has dyslipidemia and is taking exetimibe 10 mg daily and garlic. Her current cholesterol is 240 mg/dL, HDL is 41 mg/dL, LDL is 163 mg/dL, and triglycerides are 183 mg/dL. Her blood pressure today is 174/94, and her pulse is 90. Review the medications she is taking for hypertension and dyslipidemia. Evaluate the efficacy of these medications. Review them in terms of her age, gender, and ethnicity. Suggest any changes you would recommend, with clear justification for those choices. For medications, include dosages and schedules. Include highlights of patient teaching and/or lifestyle alterations. Support your decisions with at least one reference to a published clinical guideline and one peer-reviewed publication.

Paper For Above instruction

Introduction

Price discrimination is a strategic pricing practice where a firm charges different prices to different consumer groups for the same product or service, based on willingness or ability to pay. It aims to maximize profits by capturing consumer surplus and tailoring prices to varying demand sensitivities across different segments (Varian, 2010). Examining whether specific pricing strategies constitute price discrimination depends on whether the seller charges different prices based on consumer characteristics, geographic segments, or other discriminatory criteria. This paper explores various aspects of price discrimination, illustrating with examples and computations based on hypothetical scenarios, and evaluates conditions necessary for its practice, especially focusing on the airline industry. Additionally, it discusses the benefits to consumers and the legal constraints associated with such practices.

Analysis of Chevrolet’s Pricing and Price Discrimination

The prices for Chevrolet’s five car models—Spark, Sonic, Cruze, Malibu, and Impala—are $12,270; $14,245; $16,170; $22,565, and $27,060 respectively. These prices reflect different market segments, but whether this constitutes price discrimination depends on whether Chevrolet charges different prices based on consumer characteristics or geographical market segments. Given that these are suggested retail prices, it could be argued that they are standard manufacturer’s pricing rather than negotiated or segment-specific prices.

Price discrimination traditionally occurs when a seller charges different prices for identical or similar goods to different consumers, based on their willingness to pay (Stiglitz, 2000). In this case, unless Chevrolet charges different prices in different markets or to different buyers, this pricing scheme mainly reflects product positioning and market segmentation rather than discrimination. However, if regional pricing variations exist, this could constitute third-degree price discrimination (Varian, 2010).

Price Sensitivity and Profit Maximization in Consumer Goods

In the context of consumer products across North and South America with varying price sensitivities, the optimal pricing strategy involves understanding demand elasticities. The firm’s estimated elasticities are -1.25 in North America and -1.50 in South America, with a constant marginal cost of $75.

The profit-maximizing monopoly price (P*) is obtained using the elasticity-based markup rule:

P* = (E / (E+1)) × MC

For North America:

P* = (-1.25 / (-1.25 + 1)) × $75

P* = (1.25 / 0.25) × $75

P* = 5 × $75 = $375

Similarly, for South America:

P* = (1.50 / (1.50 + 1)) × $75

P* = (1.50 / 2.50) × $75

P* = 0.6 × $75 = $45

Since prices cannot be below marginal cost, these calculations indicate the need for adjustments, notably for the North American market, where the calculated price significantly exceeds marginal cost. Proper profit maximization should integrate demand functions directly, and considering practical constraints, prices would be set slightly above marginal costs, adjusted for demand elasticities.

Types of Price Discrimination

The three types of price discrimination are:

1. First-degree (perfect) discrimination: Charging each consumer their maximum willingness to pay. Example: A car dealer negotiating individual prices with each customer. This form is rare due to the difficulty in accurately estimating each consumer's maximum willingness to pay.

2. Second-degree: Price varies based on the quantity purchased or product version, without knowledge of individual customers’ willingness to pay. Example: Bulk discounts.

3. Third-degree: Price varies based on consumer group or segment, often geographically or demographically. Example: Student discounts or regional pricing.

First-degree discrimination is challenging because it requires knowing every consumer's exact maximum willingness to pay, which necessitates detailed consumer information, and implementing such tailored pricing without violation of laws can be difficult.

Pricing Strategies in the Airline Industry

Using demand functions P = 200 – 3Q (business) and P = 120 – 0.6Q (leisure), with marginal cost $20, the profit-maximizing price and quantity for each segment are calculated as follows:

For business travelers:

Total revenue (TR): TR = P × Q

Optimal price (P*) occurs where marginal revenue equals marginal cost:

From demand function P = 200 – 3Q:

Marginal Revenue (MR) = derivative of TR = P + Q × (dP/dQ) = 200 – 6Q

Set MR = MC:

200 – 6Q = 20

Q_b = (200 – 20) / 6 ≈ 30

P_b = 200 – 3×30 = 200 – 90 = $110

For leisure travelers:

Demand: P = 120 – 0.6Q

MR = 120 – 1.2Q

Set MR = MC:

120 – 1.2Q = 20

Q_l = (120 – 20)/1.2 ≈ 83.33

P_l = 120 – 0.6×83.33 ≈ $70

Thus, the airline should charge approximately $110 for business passengers and $70 for leisure passengers, selling about 30 and 83 seats respectively.

Diagram and Further Analysis

A demand and supply diagram illustrates the seat allocation and pricing for both segments. As marginal cost increases slightly, fares are likely to rise for both segments because the marginal cost curve shifts upward, reducing profit margins at previous prices. Not all seats are likely to be sold if prices are set above the equilibrium quantity; lowering prices could increase sales and overall revenue.

In terms of fleet assignment, prioritizing seats for the more profitable segment (business travelers) maximizes revenue. Since business travelers’ willingness to pay is higher, allocating more seats to this segment could improve profitability, provided capacity isn't constrained.

Conditions for Third-Degree Price Discrimination and Airline Practices

Third-degree price discrimination requires the firm to:

- Segregate markets based on consumer group characteristics,

- Prevent resale between segments,

- Have different price elasticities of demand across segments.

Airlines meet these conditions via:

- Flight route segmentation,

- Different pricing for domestic versus international routes,

- Class differentiation, and

- Loyalty programs that segment customers.

Consumer Benefits and Drawbacks

Price discrimination allows firms to serve multiple market segments efficiently and increases overall output. Consumers that benefit include those in lower-priced segments (e.g., leisure travelers in discounted classes). Conversely, higher-paying customers may end up subsidizing lower-priced segments, which can reduce perceived fairness.

Walmart’s Price Matching and Consumer Impact

While Walmart’s price match promise may seem beneficial, it can reduce the incentive for competitors to lower prices, potentially leading to higher prices overall. For consumers, this may limit the benefits of competitive pricing in the long term, especially if Walmart's matching policy discourages effective price competition.

Conclusion

Price discrimination is a complex strategic tool that, when applied correctly, benefits firms and certain consumer segments but can also lead to concerns over fairness and market efficiency. Understanding its types and the conditions required reveals how firms like airlines utilize these strategies to optimize revenue, while consumer benefits depend on their segment and willingness to pay.

References

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