# Chapter 3

Topics: Economics, Supply and demand, Elasticity Pages: 3 (393 words) Published: July 30, 2014
﻿1. Jim & Co. produces a single product. It runs an advertising campaign it is sure will differentiate its product from their competitors by making it more attractive. Assuming that Jim & Co. are correct, what will happen to the demand for its product and what pricing strategy should it employ?

a.
Demand will become more elastic and they should lower the price.

b.
Demand will become more elastic and they should raise the price.

c.
Demand will become less elastic and they should lower the price.

d.
Demand will become less elastic and they should raise the price. Jim & Co. owns and operates a hotel with 300 rooms in downtown San Diego. It estimates that the short run marginal cost (MC) of a single hotel room is about \$40 per day (cleaning, cooling, etc.). To determine the optimal price of a hotel room, the firm should

a.
choose a price that matches demand to capacity.

b.
use the straight-forward MC = MR rule.

c.
consider the lost profit from building only 300 rooms instead of 400.

d.
adjust short run marginal cost the long run marginal cost.
1. Consider the following payoff table. In this table, Player 1's payoffs are written FIRST in each pair.

Player 2

Strategy
High Price
Low Price
Player 1
High Price
(10, 10)
(5,-5)

Low Price
(-5, 5)
(0, 0)
2. Which of the following is Nash equilibirum payoffs in a one-shot game?

a.
(0, 0)

b.
(5, -5)

c.
(-5, 5)

d.
(10, 10)

QUESTION 21
1. You are the manager of a pizza parlor that produces at a marginal cost of \$6 per pizza. The parlor is a local monopoly near campus (there are no other restaurants or food stores within 50 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 of -4 and the faculty have an elasticity of demand of -2, what should your pricing policy, i.e. what prices should you charge,  be to maximize profits?...