Managerial Economics:
Pricing Practices
(Chapter 11)
CHAPTER EXERCISES
11.1 Assume that an individual’s demand for a product is Q = 20 - 0.5P. Suppose that the market price
of the product $10.
a. Approximate the value of this individual’s consumer surplus for ∆Q = 1.
= =
Pi= 40 - 2Qi
CS= [40 – 2 (1)] + [40 – 2 (2)] + [40 – 2 (2)] + [40 – 2 (4)] + [40 – 2 (5)] + [40 – 2 (6)] + [40 – 2 (7)]
+[40 – 2 (8)] + [40 – 2 (9)] + [40 – 2 (10)] + [40 – 2 (11)] – 10
= $198
b. What is value of consumer surplus as Q Æ 0?
CS = 0.5(40 - 10)11
= 0.5 (30)11
= $165
11.2 An amusement park has estimated the following demand equation for the average park guest
where Q represents the number or rides per guest, and P the price per ride. The total cost of
providing a ride is characterized by the equation TC = 2+0.5Q
How much should the park charge on a per-ride basis to maximize its profit? What is the amusement
park’s total profit per customer?
Q = 16 - 2P Per customer total profit equation
TC = 2 + 0.5Q 2
TR TC 8Q Q2 (2 0.5Q)
2P
2 162 Q2 2 7.5Q Q2
2
P 8 Q2
Maximizing output level
Q
TR = PQ = (8 )
2
dx
dQ 75 22Q 0
Q* = 7.5
Customer total revenue equation
d 2
1 0
Q2 dQ2
Q 8Q
2 7 .5
P* = 8 4.25
2
P* = 4.25
Managerial Economics:
Pricing Practices
(Chapter 11)
Suppose that the amusement park decides to charge a one-time admission fee. What admission fee
will maximize the park’s profit? What is the estimated average profit per park guest?
CS = 0.5(bcf)Q
Π = TR - TC = (bc + b1Q) q + 0.5 [bc - (bc + bsQ)] Q - TC
Q Q
(8 )Q 0.5[8 (8 )]Q (2 0.5Q)
2 2
2 2
Q 0.5Q
8Q 2 0.5Q
2 2
Q2
7.5Q 0
4
Q* = 15
15
P* = 8 0.5 MC
2
Q2
7.5Q 2
4
(15)2
7.5(15)- 2
4
Total Profit = $ 54.25
TR = (MC x Q) + CS = (MC x Q) + 0.5 (bc - MC)Q
0.5(15) + 0.5(8 - 0.5)15
Admission fee =$ 63.75
Estimated consumer surplus of average profit per guest $ 56.25
11.3 A firm sells its product in two separable and identifiable markets. The firm’s total cost of
production is TC =5+5Q. The demand equations for its product in the two markets are
Q1 = 10 -
Q1 = 20 -
where Q = Q1 + Q2.
Calculate the firm’s profit-maximizing price and output level in each market.
Q1 = 10 - (0.5)P1 ; Q2 = 20 - (0.2)P2
P1 = 20 - 2Q1 ; P2 = 100 - 5Q2
TR1 = 20Q1 - 2Q12 ; TR2 = 100Q2 - 5Q22
Managerial Economics:
Pricing Practices
(Chapter 11)
TOTAL PROFIT EQUATION
Π = TR1 + TR2 - TC = 20Q1 - 2Q12 - 100Q2 - 5Q12 - 5 - 5(Q1+Q2)
For output level in each market
ƔΠ/ƔQ1 = 20Q1 - 4Q1 - 5 = 15 - 4Q1 = 0
Q1* = 3.75
ƔΠ/ƔQ2 = 100 - 10Q2 - 5 = 95 - 10Q2 = 0
Q2* = 9.5
For firm’s profit-maximizing price
P1* = 20 - 2(3.75)
P1* = 12.5
P2* = 100 - 5(9.5)
P2* = 52.5
Verify that the demand for the product is less elastic in the market with the higher price.
MQ2 = P1 (1 + 1/E1)
MQ1 = P1 (1 + 1/E2)
E1 ( dQ P1
df1 )( Q1 )
1
E2 ( dQ P2
df 2 )( Q2 )
2
dQ1 / dF1 = -0.6 ; dQ2 / dF2 = -0.3
12.5
E1 = (-0.6) ( 3.75 ) ( 3.775.5 ) 2
50.5
E2 = (-0.3) ( 9.5 ) ( 159.5.75 ) 1.66
(The one with the higher price)
Find the firm’s total profit at the profit-maximizing prices and output levels.
Π* = 20 (3.75) - 2(3.75)2 + 100(9.5) - 5(9.5)2 -5 - 5(Q1+Q2)
= 75 - 28.13 + 950 - 451.25 - 5 - 66.25
Π* = 474.37
