Price and Simple Microwave

Topics: Price, Marginal cost, Cost Pages: 2 (369 words) Published: October 30, 2013
Suppose your elasticity of demand for your parking lot spaces is -2, and price is $8 per day. If your MC is zero, and your capacity is 80% full at 9 A.M. over the last month, are you optimizing? We are clearly not optimizing because we are only optimized when marginal revenue equals marginal cost. Because our costs are sunk we should lower our prices so that we can fill to capacity.

A manufacturer of microwaves has discovered that male shoppers have little value for microwaves and attribute almost no extra value to an auto-defrost feature. Female shoppers generally value microwaves more than men and attribute greater value to the auto-defrost feature. There is little additional cost to incorporating an auto-defrost feature. Since men and women cannot be charged different prices for the same product, the manufacturer is considering introducing two different models. The manufacturer has determined that men value a simple microwave at $70 and one with auto-defrost at $80 while women value a simple microwave at $80 and one with auto-defrost at $150. If there is an equal number of men and women, what pricing strategy will yield the greatest revenue? What if women compromise the bulk of microwave shoppers? With an equal number of men and women shoppers we should charge $70 for the simple microwave and $139 for the microwave with auto-defrost. This will help us maximize our revenues at $209 per pair sold. This gives female shoppers a value surplus of $10 on the simple microwave but a value surplus of $11 on the microwave with defrost while maximizing value for the simple microwave for men. If women are the bulk of our shoppers we may sell only the model with defrost for the full value of $150 but we need to ensure that we do not cannibalize our sales below our mixed product sales.

At a student café, there are equal numbers of two types of customers with the following values. The café owner cannot distinguish between the two types of students...
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