The resort’s operating costs are essentially the same in winter and summer.
Management charges higher nightly rates in the winter, when its average
occupancy rate is 75 percent, than in the summer, when its occupancy rate is
85 percent. Can this policy be consistent with profit maximization? Explain.- In 1996, the drug Prilosec became the best-selling anti-ulcer drug in the
world. (The drug was the most effective available, and its sales
outdistanced those of its nearest competitor.) Although Prilosec’s
marginal cost (production and packaging) was only about $.60 per daily
dose, the drug’s manufacturer initially set the price at $3.00 per dose—a
400 percent markup relative to MC!
Research on demand for leading prescription drugs gives estimates
of price elasticities in the range 1.4 to 1.2. Does setting a price of
$3.00 (or more) make economic sense? Explain. - Explain how a firm can increase its profit by price discriminating. How
does it determine optimal prices? How does the existence of substitute
products affect the firm’s pricing policy? - Often, firms charge a range of prices for essentially the same good or
service because of cost differences. For instance, filling a customer’s one-
time small order for a product may be much more expensive than
supplying “regular” orders. Services often are more expensive to deliver
during peak-load periods. (Typically it is very expensive for a utility to
provide electricity to meet peak demand during a hot August.) Insurance
companies recognize that the expected cost of insuring different customers
under the same policy may vary significantly. How should a profit-
maximizing manager take different costs into account in setting prices? - In what respects are the following common practices subtle (or not-so-
subtle) forms of price discrimination?
a. Frequent-flier and frequent-stay programs
b. Manufacturers’ discount coupon programs
c. A retailer’s guarantee to match a lower competing price - A private-garage owner has identified two distinct market segments:
short-term parkers and all-day parkers with respective demand curves of
PS 3 (QS/200) and PC 2 (QC/200). Here P is the average
hourly rate and Q is the number of cars parked at this price. The garage
owner is considering charging different prices (on a per-hour basis) for
short-term parking and all-day parking. The capacity of the garage is 600
cars, and the cost associated with adding extra cars in the garage (up to
this limit) is negligible.
a. Given these facts, what is the owner’s appropriate objective? How can
he ensure that members of each market segment effectively pay a
different hourly price?
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