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PROBLEM SESSION #7
Required lines in brackets
1. Vacationers usually pay less for airline tickets relative to business travelers. Travelers who stay
over a Saturday night also usually pay less for tickets. Also, travelers who purchase their tickets
well in advance pay less. Why? Provide an explanation (4)
2. Why may randomized pricing lead to higher average prices in a store?(3)
3. An auto dealer in Chicago recently told his mother that he makes no money on the sales of his
cars but the markup on required accessories is 200 percent. Can this possibly be a profitmaximizing strategy? Explain. (4)
4. If the government imposes a price control on product x, how can a seller of products x
circumvent the price control without breaking the law, even when the firm is required to invoice
x at the controlled price? (3)
5. McDonald's charges a higher price for a Big Mac in New York City than it does in a small town in
Iowa. Is this an example of third degree price discrimination? Explain (3)
6. Many restaurants have found that it is advantageous to offer free appetizers with a two-drink
minimum during a limited number of hours. Is this profit-maximizing behavior? Why or why
not? (2)
7. You manage a supermarket owned by Star Express. Your parent firm owns a chain of
supermarkets. You observe different prices for some products in the supermarkets owned by
the firm. For example, while your supermarket charges $1 for bubble gum, another
supermarket in the chain charges $1.20 for the same bubble gum. You also observe that
supermarkets in the chain do not necessarily have the same layout. There’s no reason to
believe that the costs of serving customers are different. Provide an explanation for what is
going on here. What relationship, if any, may exist between the differences in prices and the
differences in layouts? (5)
8. Grocery stores make most of their profits on soft drinks, beer, chips, and candy. A casual look at
prices of these items reveals that these prices change extremely often and can vary as much as
50 percent. Is this a beneficial (to the stores) strategy? Explain fully. (3)
9. At Superstore, bags with both small and large potatoes bundled together at random cost
relatively less than bags with large potatoes (both bags weigh the same). Offer an explanation
as to why. (4)
10. You are the manager of a pizzeria that produces at a marginal cost of $6 per pizza. The pizzeria
is a local monopoly near campus (there are no restaurants or food stores within 500 miles).
During the day, only students eat at your restaurant. In the evening, while students are
studying, faculty members eat there. If students have an elasticity of demand for pizzas of -4
and the faculty has an elasticity of demand of -2, what should your pricing policy be to maximize
profits?