Running Head: Managerial Economics And Globalization 127664

Running Head Managerial Economics And Globalization

Using the Marginal Approach 1A . Suppose your company runs a shuttle business of a hotel to and from the local airport. The costs for different customer loads are: 1 customer: $30 2 customers: $35 4 customers: $38 5 customers: $48 7 customers: $68. What are your marginal costs for each customer load level? (Chart) Number of Customers Total Cost Marginal Cost Total Revenue ($10 per ride) Profit 1 $30 - $ $32 $2 $ $35 $3 $ $38 $3 $ $42 $4 $ $48 $4 $ $57 $9 $ $68 $11 $ arg TotalCost MinalCost Output D = D Re argRe Total revenue Minalvenue Output D = D 1B. If you are compensated $10 per ride, what customer load would you choose? Marginal Cost is the change in costs due to the additional customer. Since marginal revenue is the price of $10, you will serve customers up to the point where MR ≥ MC or you will serve 7 customers. Marginal Cost is the change in costs due to the additional customer. Since marginal revenue is the price of $10, you will serve customers up to the point where MC

Paper For Above instruction

Managerial economics involves analyzing business decisions using economic theory to maximize organizational objectives. In the context of globalization, managerial decision-making becomes more complex due to increased market competition, diverse customer preferences, and the necessity of strategic pricing and product differentiation. This paper explores several core concepts in managerial economics—marginal analysis, elasticity, price discrimination, and bundling—applied within a globalized environment, illustrating how firms can optimize profits amidst increasing competition and market complexity.

Problem 1: Using the Marginal Approach

To determine optimal customer load, we first calculate the marginal cost (MC) for each customer level. Marginal cost is the change in total cost when one additional unit (customer) is served. Based on the provided data, the total costs for varying customer loads are: $30 for 1 customer, $35 for 2 customers, $38 for 4 customers, $48 for 5 customers, and $68 for 7 customers. The marginal costs are derived by subtracting the previous total cost from the current total cost.

• From 1 to 2 customers: MC = $35 - $30 = $5
• From 2 to 4 customers: MC = $38 - $35 = $3 per customer on average, implying $3 per additional customer
• From 4 to 5 customers: MC = $48 - $38 = $10
• From 5 to 7 customers: MC = $68 - $48 = $20 for the additional two customers, or $10 per customer.

Assuming a revenue of $10 per ride, the marginal revenue (MR) for each customer equals $10, as the price is constant per ride. To maximize profit, the firm should serve customers up to the point where MR ≥ MC. Based on the calculated MC, this would mean serving up to 7 customers because at 7 customers, MC is $10, equal to MR, indicating profit maximization. Serving beyond this point would result in marginal costs exceeding marginal revenue, reducing profit.

Thus, the optimal customer load, based on marginal analysis, is 7 customers.

Problem 2: Elasticity and Pricing

The demand elasticity has increased from -2 to -3 due to heightened competition. Price elasticity of demand measures sensitivity: the more elastic (higher absolute value), the more responsive consumers are to price changes. The optimal pricing rule for elastic demand is to set price where marginal revenue equals marginal cost, respecting the price elasticity. When elasticity moves from -2 to -3, the firm can lower prices further to increase total revenue. Assuming the current price is $10, and the elasticity is now -3, the optimal price can be calculated using the price elasticity formula:

P = (E / (E + 1)) * MC,

where E is elasticity, and MC is marginal cost, assumed to be $5 for illustration. Plugging in E = -3:

P = (-3 / (-3 + 1)) $5 = (3 / 4) $5 = $3.75

Since prices must be set in whole dollars, the firm should consider setting the price around $4 to maximize revenue under the more elastic demand.

Problem 3: Price Discrimination

The amusement park aims to maximize profits by price discrimination across two markets: adults and children. The demand schedule indicates different willingness to pay, and the marginal operating cost per unit is $5. In such cases, setting different prices in each market allows capturing consumer surplus more effectively, increasing overall profit.

A. Adult Market Pricing

Suppose the demand for adults suggests that at a certain price, quantity sold maximizes profit. If, for instance, the demand schedule indicates that setting a price of $15 attracts 10 adults, total revenue (TR) is $150. The marginal revenue (MR) at that point equals the change in TR for additional units, and total cost is (quantity * $5). The profit is TR minus total cost.

B. Children Market Pricing

Similarly, for children, a lower price may increase quantity sold. For example, at a price of $8, if 20 children purchase tickets, TR is $160, with a total cost of $5 * 20 = $100, resulting in a profit of $60.

C. Uniform Pricing in Both Markets

Charging the same price across both markets involves estimating a price point where total combined quantity maximizes profit, considering the demand schedules for both groups. For example, setting a uniform price of $12 might yield a total of 15 units (10 adults and 5 children), with TR – total costs reflecting the net profit.

D. Profit Comparison and Analysis

The profit under differentiated pricing typically exceeds that of uniform pricing because it allows capturing maximum consumer surplus from each segment. Price discrimination enables the firm to sell more at higher prices to less elastic segments, increasing total profit. When charging uniformly, the firm loses potential surplus from consumers willing to pay more, thereby lowering overall profitability.

The key takeaway is that price discrimination generally leads to higher profits by tailoring prices to different market segments, albeit with increased operational complexity. In a globalized economy, firms that implement effective segmentation and pricing strategies can better exploit diverse consumer preferences, leading to superior financial outcomes.

Problem 4: Bundling Decisions

Time Warner's decision to bundle or sell TV channels separately hinges on consumer reservation prices and cost considerations. Selling channels separately allows capturing higher consumer surplus from those willing to pay more, while bundling can attract consumers interested in both channels at a combined lower price.

A. Unbundled vs. Bundled Profits

For example, suppose Customer 1 values Showtime at $9 and the History Channel at $8, while Customer 2 values both at slightly lower levels. Selling separately at their reservation prices yields higher revenue per consumer. The profit calculations involve subtracting the license fee ($1) from these prices and summing over the number of consumers who purchase. Bundling at a price just below the sum of individual prices, say $13, might incentivize both customers to buy the bundle, increasing total sales but possibly reducing individual consumer surplus.

B. Mixed Bundling Strategy

Implementing mixed bundling, where both channels are sold separately at $9 and $8, and as a bundle at $13, allows capturing different customer preferences. Customers with higher willingness to pay for both channels will purchase the bundle, while others may buy only one. Profitwise, this strategy often increases total revenue because it caters to diverse willingness to pay and maximizes consumer participation. If, for example, both customers buy the bundle at $13, and two customers buy channels separately, total profit can be optimized by balancing individual and bundle sales, increasing overall profitability compared to exclusive bundling or selling separately.

Conclusion

Effective bundling and pricing strategies are crucial for maximizing revenues in media markets. Analyzing consumer reservation prices and operational costs enables firms to decide whether to bundle or sell individually. Mixed bundling offers flexibility, capturing a broader spectrum of consumer surplus and enhancing profits. In a competitive, globalized environment, employing such differentiated strategies is indispensable for maintaining profitability and market share.

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