EM Module 1, EM Module 2, EM Module 3, EM Module 4, EM Module 5

Suppose that normally your WTP for a cashmere sweater is $100. What would your WTP for a cashmere sweater be if they marked it 50% off?

$100 Price does not affect your WTP, so your WTP will not change based on a sale

A women's apparel retailer has run a survey of their existing customers eliciting preferences on skirt styles. If the retailer follows the respondents' suggestions, which of the following is most likely to occur?

Existing customers will purchase more from the retailer. Since the survey's responses came from the existing client base, they represent those customers' preferences, but not necessarily anyone else's preferences. Following these suggestions would cater to the tastes of the existing customers, and would likely increase the intensity with which they purchase items from the retailer.

Suppose that your WTP for one stick of deodorant is normally $5. The price of deodorant is also typically $5. However, this week your local store is having a buy one, get one ("BOGO") free sale on your favorite brand. What is your WTP for one stick of deodorant now?

$5 Even with the buy one, get one ("BOGO") free sale, your WTP remains at $5. This is because price does not affect your WTP.

Two companies, A and B, are bidding to acquire a target firm. Their initial bids are $300 million by firm A and $350 million by firm B. The internal analysis done by each company indicates that the value of the target firm is $500 million to company A and $450 million to company B. In this example, which of the following values is likely to approximate company A's willingness to pay?

$500 million Company A would be willing to pay up to $500 million, which is the approximate value it will derive from the target firm.

A clothing store is selling a new style of bathing suits in preparation for the summer season. The store's manager thinks that consumers' willingness to pay for a bathing suit is $65 each, but she is not confident in her estimate. She wants to sell the bathing suits within the next 6 months, before summer ends, because after that she needs to make room in the store for the next year's styles. What price should the manager set for the bathing suit?

$75 The manager can price the bathing suits at $75 each to see if they will sell. If they do not, there is plenty of time to decrease the price.

What is the price elasticity of demand as the price drops from $30 to $26? Remember that quantity demanded increased from 25 to 27.

0.6 Quantity has increased by 8% (2/25), and price has decreased by 13.3% (4/30). Elasticity is 8%/13.3%, 0.6.

After selling 400 shirts at a price of $20, the owner decides to cut prices once again. At a price of $15, 500 shirts are sold. What is the price elasticity of demand in this case?

1 Elasticity is the percent change in quantity demanded divided by the percent change in price. Quantity increased by 25%, or 1/4, and price decreased by 25%, or 1/4. change in quantity: 400 -> 500 (500/400 - 1.25 increase by 25%/1/4) price decrease (20->15: 0.72 (1/4 decrease) 0.25/0.25 = 1

A restaurant sells salsa and guacamole, each of which can be eaten with the tacos that the restaurant sells. The manager of the restaurant is not sure whether salsa and guacamole are substitutes or complements. However, after increasing the price of guacamole from $2.00 to $2.50, the manager notices that daily salsa sales rise by 5%. What is the cross price elasticity of salsa and guacamole, and what can the manager conclude about their relationship?

1/5. Salsa and guacamole are substitutes. Cross price elasticity is the percent change in quantity demanded of one good (+5%) divided by the percent change in price of the other good (+25%). A positive cross price elasticity indicates that the goods are substitutes.

Here is the demand for scones again: Price per scone: for $3 : everyone is willing to buy 4 If these are the only consumers in the market, and scones are sold at a price of $3 per scone, what is the market quantity demanded?

16 Quantity demanded is calculated by summing up the quantity demanded by each consumer. Notice that even though Aaron's demand curve doesn't indicate strictly diminishing marginal returns, the market demand curve is downward sloping. 4 people willing to buy 4 = 16

A product manager is trying to determine customers' preferences for car features. The manager has identified 5 relevant product features, and a range of possible settings for these features, as shown in the table below. If the product manager ran a survey asking respondents to rank all possible combinations of cars, how many different cars would the respondents have to rank? Price: 4 prices Mileage: 4 types type of car: 3 different Upholstery: 2 options Transmission: 2 options

192 There are 4*4*3*2*2=192 possible combinations of features.

Suppose that Alex, Maria, and Raj are the only 3 buyers of chocolate ice cream in the market. Based on the chart below showing each buyer's willingness to pay for each additional cone, what is the price elasticity of demand for a change in price from $3 to $4 dollars? 1st cone $8 $6 $4 2nd cone $5 $4 $4 3rd cone $3 $3 $1 4th cone $2 $1 $0

3/4 We can determine the total market demand at $3 by adding together the total number of cones at which Alex, Maria, and Raj's WTP is $3 or higher. We can see that Alex will buy 3 cones at $3 or higher, Maria will also buy 3, and Raj will buy 2, which adds up to a total of 8 cones demanded at $3. Repeating the same process for $4 (or higher), we get 2 cones for Alex, 2 cones for Maria, and 2 cones for Raj, which adds up to a total of 6 cones demanded at $4. Once we have these quantities for demand at the new and old prices, we can plug them into the equation for price elasticity of demand = absolute value of [(6-8)/8]/[(4-3)/3] = 3/4.

You run an ice cream chain, and decide to conduct a survey to gauge which flavors your customers prefer. You ask the respondents to rank three flavors: vanilla, chocolate, and strawberry. The results are: 50 people ranked: (1) vanilla (2) strawberry (3) chocolate 100 people ranked: (1) chocolate (2) vanilla (3) strawberry What proportion of the respondents prefers vanilla over chocolate?

33% 33% of respondents ranked vanilla higher than chocolate, and because we have asked customers their relative rankings, rather than their true WTP, they are unlikely to lie.

A store owner is selling shirts at a price of $25 each. At this price, 300 shirts are sold. The owner then puts the shirts on sale, offering them for $20 each. At this price, 400 shirts are sold. What is the price elasticity of demand in this example?

5/3 Elasticity is the percent change in quantity demanded divided by the percent change in price. Quantity increased by 33%, or 1/3, and price decreased by 20%, or 1/5.

Which of the following statements regarding complements is true? Select all that apply.

A consumer is willing to pay more to purchase two complementary goods together. The cross-price elasticity of demand for two goods that are complements will be negative. A consumer is less likely to purchase a good if a complement for that good is not available.

A landlord is renting out an apartment and has three prospective tenants. The first tenant is willing to pay $1200/month, the second tenant is willing to pay $3000/month, and the third tenant is willing to pay $2000/month. Each potential tenant knows the valuations of the other tenants. Of the following methods of renting the apartment, which would generate the greatest revenue?

A fixed price of $2200/month (highest price amongst the options) At this price, the apartment will be rented for $2200/month. This is the only option in which the apartment is rented for significantly more than $2000/month.

An artist is selling her latest painting. She knows that there are three interested buyers, who value the painting at $500k, $700k, and $800k, respectively. Which of the following methods will generate the most revenue?

A fixed price of $750k The painting will sell at this price, bringing in $750k of revenue.

Whereas most websites and online web services must continually update and improve user design, Craigslist, a classified advertisements website, has remained largely the same since 1996. What phenomenon might explain this?

A network effect that makes switching to competitor sites difficult. Once Craigslist became popular, it had more sellers and buyers than other sites, making it the most attractive site to use regardless of whether it had been updated and improved.

Which of the following businesses would likely launch an advertising campaign promoting its industry without mentioning its brand name?

A single manufacturer that sells the only type of car available in a country. (A firm that dominates an industry can advertise without promoting its brand because new consumers in the industry will most likely end up purchasing from the firm anyway)

Which of the following groups would be most likely to launch an advertising campaign badmouthing its competitors?

A smartphone operating system developer with a single major competitor

In which of the following scenarios is the winner of the auction LEAST likely to suffer from the winner's curse? A son winning his mother's favorite painting to give her for her birthday. A diamond dealer placing the winning bid for a set of stones on the diamond exchange. A construction company bidding on a contract to build a new apartment complex. A restaurant bidding on a prime NYC location.

A son winning his mother's favorite painting to give her for her birthday. In this auction, the buyer's valuation of the product does not depend on others' valuations and/or information.

You want to market your brand of apparel to a younger demographic. To find out more about consumers' tastes, you are thinking of conducting a survey. Which type of survey would be most effective in this case?

A survey of local teenagers asking how they choose which products to purchase Since the goal is to target a younger demographic, the survey should focus on younger respondents rather than existing consumers or the general population.

Your toy company is looking into launching a new line of dolls and action figures but is unsure if kids these days still actually play with them. As part of your market research, you send out a survey to 1000 households that have purchased toys in the last five years. You also decide to run two focus groups: one group of children ages 4-16 and one group of parents. Which of the following questions asked in a survey or focus group would be unbiased and allow you to gain reliable information? Select all that apply.

A survey question asking households, "What fraction/percentage of income do you estimate that your family spends on entertainment in a given month?" An anonymous survey question asking children, "what's your favorite toy and why do you like to play with it?

Which of the following scenarios illustrates the concept of diminishing marginal returns?

Alexis would pay $3 for a cup of coffee, but would only pay $4 total for two cups. This scenario illustrates the concept of diminishing marginal returns. The first cup is worth more to Alexis than the second cup, so she is not willing to pay as much for the second cup.

Which of the following groups is NOT a competitor for Amazon? Overstock.com, another online shopping site The businesses that sell their products through Amazon.com UPS, a delivery service that Amazon uses to ship products to customers Amazon Prime customers that use the site to regularly shop

All of the above are competitors for Amazon. A business' competitors include not only other companies in its industry, but also parties with which the business competes to capture value, such as suppliers and customers.

A used car salesman is one automobile away from hitting his annual sales quota. Three buyers are interested in purchasing an old sedan—their WTP for the car can be seen in the table below: WTP for Sedan Ann $15,000 Ben $8,000 Charlie $12,000

All of the above will generate roughly the same revenue. With so few bidders, the sealed-bid first-price auction could generate more or less revenue than the other two methods. As a rule of thumb, however, each of the above methods will generate approximately the same revenues for the seller.

Which of the following events would, all else equal, cause a rightward shift of the demand curve for yachts? Select all that apply.

An increase in household income (An increase in income would allow more households to be able to afford yachts, shifting the overall demand for yachts at any given price to the right) The elimination of a regulation, which had prevented boats from sailing on a particular series of lakes (The elimination of a regulation on boats would increase the demand for yachts to sail in previously forbidden waters)

A company is planning to purchase data from a social network on characteristics of that network's users. It can then use this data to decide which customers to advertise to. The company decides to purchase data on the users' location (ZIP code) and relationship status (it believes both these attributes are important in understanding customer demand), but does not purchase data on user characteristics such as number of friends, gender, current employment, etc. Which of the following products is the company most likely selling?

An online dating service The company is targeting single people of both genders, and is probably interested in location because consumers will be more interested in its service if there are other users nearby.

Suppose that in a certain region, the markets for t-shirts, online social networking, cars, and household appliances are each served by only two competing firms. Of the following four firms, which one is least likely to be successful in the long run? A t-shirt company that sells 25% of the t-shirts in the market An online social network preferred by 30% of consumers A car manufacturer with 25% market share A household appliances store that serves 35% of the market

An online social network preferred by 30% of consumers The competing firm has already captured 70% of the market. Since online social networks exhibit strong network effects, it is unlikely that the smaller firm will be able to catch up (and if anything, its market share will decrease over time).

An airline conducting a focus group learns that consumers would rather have more frequent delays in flights if it meant that there would be more flights scheduled every day on a given route. What can the airline do with this information? Select all that apply.

Ask follow-up questions to determine the length of delays that focus group participants would be willing to tolerate in exchange for the more frequent flights Design a follow-up survey asking more consumers how they would make tradeoffs between on-time departures and more scheduled flights.

Fred is going on a vacation, but cannot take his dog, Lulu, with him. Fred has found a company called Pampered Pets Resort that offers dog babysitting for $30 per night, and decides to leave Lulu there. Fred's willingness to pay for dog babysitting is:

At least $30 per night

A budding tech startup has created a unique compression algorithm that consumers can use to reduce the size of their computer files. The company was previously charging $40 a month for their "unlimited plan" that allows users to compress as many files as they want. The company decides that it is not making enough revenue, however, and increases the price for their "unlimited plan" from $40 to $60. They notice that the amount of users that subscribe to the unlimited plan decreases from 5,000 to 4,500 once the price change comes into effect. Based on this information, which of the following must be true?

At the original price the demand is relatively inelastic The price elasticity of demand at the original price point would be equal to the absolute value of [((4500-5000)/(5000)) / ((60-40)/(40))] = 0.2, relatively inelastic. The company can make more revenue by charging a higher price.

Average Cost

Average Cost=Total Fixed Cost+Total / Variable CostTotal Quantity Produced

The table below shows one consumer's demand for blueberry scones. What is the consumer's willingness to pay for his sixth scone?Price per scone Dan's quantity demanded $5 - 2 $4 - 3 $3 - 4 $2 - 5 $1 - 6

Between $1 and $2 If the price of scones is $2, Dan will purchase only five scones. If the price drops to $1, Dan will purchase the sixth scone. His WTP for the sixth scone must be between $1 and $2.

The theme park from the previous question has finished building its fun house. The project cost $240,000 in total and requires two employees to operate it each day costing $50 per employee per day. The park estimates that approximately 400 guests will enter the fun house per day, each paying $1 to enter. After how many years will the theme park break even from operating the fun house?

Between 2 and 3 years The park makes $400 in revenues each day from guests and must pay $50*2=$100 to its employees each day as costs of operation. Profits per day are thus equal to $400-$100=$300. With these profits, it will take the park 800 days to recover the total amount it spent building the fun house.

What is the main network effect exhibited by Microsoft Word?

Compatibility with other businesses and users

Al's Autos, a car rental company, spends $2.1 million per year on car purchases, routine maintenance and other fixed costs. The company rents out cars at an average rate of $100 per day, and incurs variable costs of $70 per day for each rental. In past years, the business has rented out 100,000 cars per year. However, the city in which the company is located has become a less popular tourist destination, causing consumers to travel there less frequently. The rental company anticipates that it will have 25% fewer customers in coming years. What should Al's do?

Definitely stay in business Despite the large drop in rentals from 100,000 to 75,000, Al's is still able to cover both variable and fixed costs. It should remain in business for the time being, unless it continues to lose customers to the point at which it can no longer cover its total yearly costs.

Just as perceptions of fairness can impact customer WTP, a customer's perception of the reputation of the seller of a product or service can have an impact on his or her purchasing decisions. Based on what you know about factors that determine WTP, which of the following is plausible?

Despite higher prices, shoppers in a local town prefer to shop at Joe's Groceries over chain supermarkets in order to support small businesses. After reports of child labor in its factories abroad, a clothes manufacturer sees a decline in quarterly sales of 10%. The stock price of BIG Inc., a large company, rises after its CEO decides to forgo a salary and increase the minimum company wage. (all of the above)

Which of the following statements is true?

Elasticity does not depend on units whereas slope does. A demand curve's slope might change if the unit's demand is measured in change.

Which of the following developments will cause an increase in the value created by a firm? Select all that apply.

Employees at the firm are willing to take a pay cut to work for the company. (This would decrease suppliers' willingness to sell a key input, creating more value overall.) Consumer preferences change and average WTP for the company's products increases. (If customers' are willing to pay more, but the company leaves prices the same, it is creating more value for its customers without decreasing the value captured by the firm or its suppliers.)

A hotel spends $1 million per year on rent and other fixed costs. The hotel rents out rooms at a rate of $100 per night, and incurs variable costs of $50 per night for each occupied room. In past years, the hotel has rented out 21,000 rooms per year. However, the city has become a less popular tourist destination, causing consumers to travel there less frequently. The hotel anticipates that it will have 10% fewer customers in coming years. What should the hotel do?

Exit the industry. The hotel is now losing money each year. It is making enough money to cover its variable costs, but not enough to cover its total yearly cost. Therefore, it should stop paying rent and other fixed costs, and exit the industry.

Which of the following are fixed costs incurred by a supermarket, and which are variable?

FIXED: COST OF PHYSICAL CHECKOUT COUNTERS CASHIER SALARIES BUILDING INSURANCE COST TO CONSTRUCT PARKING LOT Variable: HOURLY WAGES FOR BUTCHERS AND BAKERS DELIVERY COSTS FOR ONLINE ORDERS

According to Forbes' list of the wealthiest Americans, the net worth of the richest Americans increased from an average of $3.8 billion in 2011 to $4.2 billion in 2012. According to the same source, the total amount committed to charity by the top 50 donors declined from $10.4 billion in 2011 to $7.4 billion in 2012. These statistics suggest that income is not an important driver of people's WTP for charity.

False Income is indeed one of the key drivers of people's WTP for charity, but other factors also matter and can skew the data. For example, the above pattern was generated mostly due to the idiosyncratic timing of certain donations - in this case, a $6 billion donation from one donor that occurred in 2011!

Is the following statement true or false? When administering a survey, the most important thing is how many responses one gets, not whom those responses are from.

False It is important to survey the correct group (e.g., existing consumers vs targeted others, etc). Getting a large number of responses from a biased customer group may be useless.

In many countries, primary education is provided for free. This means that in these countries consumers' WTP for primary education is zero; otherwise, a private market for education would have developed.

False Just because a good is provided for free does not mean that WTP for the good is zero.

Which of the following are reasons you would want to use a focus group and which are reasons you would want to use a survey?

Focus Groups: TO IDENTIFY COMPETITORS YOU HADN'T BEEN AWARE OF TO REDUCE CONSUMER MISREPRESENT-ATION OF WTP TO ASK FOLLOW-UP QUESTIONS IN REAL TIME Surveys: TO COLLECT INFORMATION WHICH CAN BE GENERALIZED TO THE POPULATION AS A WHOLE TO COLLECT QUANTIFIABLE DATA ON A LARGE SAMPLE

The graph below demonstrates the demand for an unknown product. We can conclude that this product: Graph looks like: Quantity vs price I I ㅣ I ㅣ I ㅣ Iㅡ ㅡ ㅡ ㅡ ㅡ (Quantity)

Has no substitutes The graph shows a perfectly inelastic demand curve where changes in price have no effect on the quantity demanded. Thus, it shows that the product has no substitutes.

Which of the following pairs of products would have a cross-price elasticity of demand that is negative? (Select all that apply.)

High-speed internet access and an online streaming service for TV shows Pens and pads of paper Two items with a negative cross-price elasticity are considered to be complements. An increase in the price of one good reduces the quantity demanded of the other. High-speed internet is a natural complement to online streaming services.

By how much would HiRise's average cost reduce if it increased output (and sales) by 25%?

If HiRise were to increase its output by 25%, it would decrease its costs per unit by nearly 10 cents. Remember that only the fixed costs would change on a per-unit basis—although the overhead costs, for example, would fall from $0.12 to around $0.10, each loaf would still contain $0.88 worth of ingredients.

Which of the following statements is true?

If a company that faces a downward-sloping demand curve charges the same price to all its customers, there are usually some customers who are paying less than their willingness to pay. (Unless the company sells only one unit to the customer with the highest WTP, at any price it charges there will always be people who were willing to pay even more and are paying less than their WTP at the given price)

If parking spaces and clothing in shopping malls are complements, which of the following statements is FALSE?

If the mall expands, building new clothing stores where there used to be parking, WTP for parking will decrease.

What other factors can affect the U.S. demand for gasoline? Drag each of the following events into one of three categories below depending on whether you think they increase demand (shift the demand curve to the right), decrease demand (shift the demand curve to the left), or leave demand unchanged (no shift):

Increase demand (shift right) AN ECONOMIC BOOM RAISES NATIONAL INCOME POPULATION GROWTH INCREASES THE NUMBER OF LICENSED DRIVERS Decrease demand (shift left) MORE COMPANIES ALLOW PEOPLE TO WORK FROM HOME, REDUCING THE NUMBER OF COMMUTERS LARGE INVESTMENTS IMPROVE THE AVAILABILITY OF PUBLIC TRANSPORTATI-ON CAR COMPANIES DEVELOP MORE FUEL-EFFICIE-NT MODELS THE GOVERNMENT PROVIDES A SUBSIDY FOR HYBRID CARS Leave demand unchanged (no shift) THE PRICE OF GASOLINE INCREASES THE PRICE OF GASOLINE FALLS DUE TO NEW SOURCES OF SUPPLY

As a company increases its output, which of these costs will increase, decrease, or remain the same?

Increase: TOTAL COSTS TOTAL VARIABLE COSTS Decrease: TOTAL COST PER UNIT (As fixed costs per unit decrease, total costs per unit will decrease) FIXED COSTS PER UNIT (As output increases, fixed costs will be spread across more units, and the per-unit fixed cost will fall). Remain the same: TOTAL FIXED COSTS VARIABLE COSTS PER UNIT

After increasing its average subscription prices in 2011, Netflix lost 800,000 subscribers. Despite this decrease in quantity sold, revenue for Netflix increased 49%. We can conclude that, prior to the price increase, Netflix was pricing at a point on its demand curve where demand was:

Inelastic When Netflix increased prices, revenue increased. This suggests that the company was previously operating at a part of the demand curve where demand was inelastic.

Let's make it simple and consider two points at either extreme, A and B. At point A, the price is $98 and the quantity demanded is two tickets. At point B, the price is $2 and the quantity demanded is 98 tickets. In other words, total revenue is exactly the same at both points. Now, let's say you were considering raising the price of a ticket by $1. Where would it be more profitable to do so—at point A or point B?

It's better to raise prices at B.

A jewelry store has a discount for customers who purchase multiple pairs of earrings: after paying full price for one pair of earrings, the second pair is 15% off. John goes to the store and finds a pair of earrings he likes that is sold for $40 per pair, so he purchases two pairs for a total cost of $74. Which of the following MUST be true?

John's willingness to pay for the two pairs of earrings is at least $74. Since John purchased the earrings for $74, he must have been willing to pay that much for them.

A coffee company lowers the price of its one-pound bags of coffee from $10 to $9 and as a result, quantity demanded increases from 4 million to 5 million units. What is the elasticity at that point of the demand curve? [Recall, one formula for calculating percentage changes is (New-Old)/Old.]

Quantity has increased by 25% and price has decreased by 10%. Elasticity is 25%/10% = 2.5.

A traveler's willingness to pay for a room in a hotel in a remote location is $70. The traveler's willingness to pay for a hot breakfast is $10. The traveler views hotel rooms and hot breakfast as complementary products. What is most likely the traveler's willingness to pay for a room in a hotel that includes complimentary hot breakfast?

More than $80 Since the two goods are complementary, the traveler's WTP for a bundle of the two should be higher than the sum of WTP for the two individual products.

Many movie-goers like to enjoy a bag of popcorn together with a soda beverage: one without the other is not nearly as satisfying. Suppose that a movie-theatre near you prices a small popcorn at $4.50 and a large popcorn at $6.00. A small drink costs $4.00 and a large drink costs $4.75. However, the theatre also offers a large popcorn and large drink as a packaged deal at $10.25. Which of the following is likely to be true based on the information given?

Movie goers consider popcorn and soda to be complements

Which of the following products or businesses is least likely to benefit from network effects?

National gym chain Gym chains do not benefit significantly from network effects. Aside from slight membership benefits that a frequent traveler might value, customers compare gyms in the same region rather than on a national or international scale. In fact, more members at a gym might convince some customers to frequent another gym instead if they feel the gym is too crowded.

Which of the following is NOT true regarding network effects?

Network effects exist only for services, and not physical products.

In order to test a new customer loyalty program, a supermarket sends an email to its current customers in one of its regions of operation, inviting them to opt into the new program. After several months, management observes that participants in the new program are much more frequent shoppers than the average customer. Which of the following can management conclude from this experiment? Introducing the new loyalty program in all of its regions of operation will boost sales in the future. The new loyalty program has boosted sales among its test participants. Sales to customers that did not opt into the loyalty program have decreased.

None of the above.

Suppose that you are the CEO of a national pizza chain. Your business has experienced increases in production costs over the past few years due to a continual increase in the price of cheese. When the price increases first started, your business was able to maintain its profitability by passing the higher costs on to consumers in the form of higher pizza prices. Now, however, your consumers are refusing to pay more for your product. One of your company's executives suggests acquiring your supplier of cheese in order to control input costs. By doing so, she guarantees that your company will retain your customers and stop losing money. Should you take her advice?

No—in doing so, you may retain your customers, but you will still continue to lose money overall. Your colleague is forgetting to include opportunity costs in her reasoning. Even if you acquire the supplier, you will continue to lose money from an economic point of view. This is because you could have sold the cheese to others for a higher price than what you are receiving for it by putting it in your pizzas.

A company believes that its product will exhibit network effects if enough consumers begin to use it. How might this company decide to price its product?

Offer the product for free early on, and increase the price later.

If the price of natural gas rises, when is the price elasticity of demand likely to be the highest?

One year after the price change In the short-term, customers may be unable to find substitutes and will exhibit a relatively inelastic demand for natural gas. However, over a longer time period, consumers can adjust their behavior and use substitutes, so the price elasticity of demand is higher a year after the price change.

Which of the following will cause the demand curve for a low-price wine produced in California to become flatter?

Other wine manufacturers decide to make and sell low-price wine. The demand curve for the California wine will become flatter as more substitutes become available.

An art collector is auctioning off three paintings. He has decided to use a sealed-bid second-price auction. The buyers attending the auction are the following: For painting 1: One buyer with a valuation of $100k, and one buyer with a valuation of $120k. For painting 2: One buyer with a valuation of $90k, and one buyer with a valuation of $200k. For painting 3: Two buyers with a valuation of $110k. What is the correct ranking of the revenues the collector will receive for the three paintings?

Painting 3 > Painting 1 > Painting 2 Each painting will sell at the WTP of the second highest bidder.

If this graph shows the entire demand curve faced by Pampered Pets Resort (a hotel for dogs), which of the following events is consistent with the arrows shown in the graph?

Pampered Pets Resort has increased its price, and fewer customers have sent their dogs to the resort as a result.

According to research by HBS professor Max Bazerman and others, people's perceptions of fairness can impact their purchasing decisions. Suppose that a hardware store in Harvard Square has been selling flashlights for $10, but on the day of a hurricane they raise the price to $20. Meanwhile Target, located in nearby Watertown, has kept the price of the same flashlight unchanged at $10. Based on what you know about factors that determine WTP which of the following is most plausible?

People's WTP for a flashlight at the hardware store will decrease after customers learn of this price increase. People's WTP for the flashlight at the hardware store will likely decrease because of the perceived unfairness of the price increase. Note that even the decreased WTP might still be high enough for customers to make the purchase, if they really need flashlights.

coffee company lowers the price of its one-pound bags of coffee from $10 to $9 and as a result, quantity demanded increases from 4 million to 5 million units. Assuming the company's demand curve is linear, what is the slope of the demand curve? Please treat the quantity increase as an increase from 4 to 5, ignoring the millions. [Recall, one formula for slope is Rise / Run]

Price decreases by $1 and quantity increases by 1, so slope is -1/1 = -1. price/quantity (y/x)

Which of the following statements regarding price elasticity of demand is true? Select all that apply. (important)!

Price elasticity of demand is a better measure of price sensitivity than slope. Price elasticity of demand tends to increase as price increases. Price elasticity of demand for a particular product will tend to increase as more substitute goods become available.

Pampered Pets Resort has had an average of 25 dog guests per night at its price of $30. In order to attract more customers, the company lowers its price to $26 (per dog per night), and the average number of dog guests per night increases to 27. What is the impact of the price change on Pampered Pets Resort's revenue?

Revenue decreases The additional $52 in revenue from new customers is not enough to make up for the $100 lost as Pampered Pets charges its original 25 customers less.

A certain product has a negative income elasticity of demand. What might this product be?

Rice A negative income elasticity of demand implies that a consumer will buy less of a good as his or her income increases. This could be the case for cheaper foods such as rice. A consumer with a higher income might be able to afford more expensive foods and switch to, say, quinoa, fish or steak instead.

A company books $100 million in revenue for fiscal year 2015, the most it has ever earned. However, the company earns a far lower profit than it did the previous year. What could explain this discrepancy?

The company saw the cost of its inputs increase substantially over the past year. With higher revenues, lower profits can only be explained by higher costs.

A second customer enters the bakery, where cupcakes are being sold, as before, for $3 per individual cupcake and $30 per box of 12 cupcakes. This customer purchases 15 cupcakes—1 box for $30, and 3 individual cupcakes for $3 each. Which of the following must be true of the customer's willingness to pay?

The customer's willingness to pay for 16 cupcakes is less than $42. If the customer were willing to pay $42 or more for 16 cupcakes, an additional cupcake would have been purchased for an additional $3.

In which of the following situations is an auction especially effective? Select all that apply.

The buyer is time-sensitive (Auctions are better for items that a buyer does not need right away, such as rare items or antiques. Selling necessities or items with an expiration date, such as concert tickets, via an auction would not be particularly effective) The seller does not know the WTP of its potential customers. Buyers' valuation of the auction item is within a narrow range.

The share price of a company is $20 at the beginning of the month, and $10 at the end of the month. Assuming that the company did not issue new stock during the month, which of the following statements is true? (Select all that apply)

The WTP for the company's stock fell by an average of 50% amongst all interested buyers. The overall valuation of the company fell over the course of the month. Some investors may be willing to pay more than $10 for the stock.

After running an advertising campaign intended to increase sales of its line of dishwashers, an appliance store notices that consumer WTP for its dishwashers seems to have increased. However, the store has not captured any market share from its competitors. Which of the following might explain this outcome?

The advertising campaign focused on the advantages of owning a dishwasher, but did not mention the store's specific brand of dishwasher. The campaign increased WTP for dishwashers in general, but without specifically promoting the store. Other dishwasher sellers have probably profited from the campaign in the same way.

A bakery sells individual cupcakes for $3, and boxes of 12 cupcakes for $30. A customer enters the bakery and purchases 4 cupcakes. Which of the following statements must be true of the customer's willingness to pay?

The customer's willingness to pay for 5 cupcakes is less than $15. The customer had the option to purchase 5 individual cupcakes for $15. Since the 5th cupcake was not purchased, the customer's willingness to pay for 5 cupcakes must be less than $15.

Christine is a tax accountant in the United States. Due to the complexity of the U.S. tax code, many Americans often experience difficulties filing their taxes each year. Thus, in the past, Christine has made a large sum of money on the side offering her services during tax season. This year, however, a new computer software is being sold, designed to assist Americans with their taxes for a fraction of the cost that Christine has been charging her customers. At first glance, the software appears to be quite popular. What impact will this new software have on Christine's profitability?

The impact on Christine's profitability is unclear. It's unclear how the presence of the software will affect Christine's profitability. While the introduction of the software will almost surely force Christine to charge a lower price for her services to compete, Christine's profitability also depends on her own costs. If Christine is able to use the service to improve her own productivity, her costs may also go down. If costs fall low enough, Christine may be able to maintain the same profitability or even improve her profitability if the software allows her to save time per customer and take on more customers.

In honor of National Coffee Day, Starbucks runs a promotion giving away a free grande coffee to all customers that come into the store that day. As a result, Starbucks sees its number of patrons double. What conclusion can Starbucks draw from this promotion?

The number of customers that bought coffee all had a WTP greater than $0. This is the only plausible conclusion that the company can draw. Based on this one promotion, it cannot infer anything about customer WTP (other than people really enjoy free things).

In which of the following cases would a seller be least likely to use an auction to determine the price of an item?

The seller is aware of each buyer's valuation of the item. If the seller knows buyers' WTP, it would be easier to set a fixed price for the item.

You conduct a survey asking 200 people what is the maximum amount they would be willing to pay for dinner at a nice restaurant. You receive the following responses. $50 - 100 people $100 - 100 people

The true average willingness to pay of respondents could be greater than $80. Respondents have an incentive to lie, so it is possible that their true average WTP is higher than indicated by their responses.

Suppose that the table below shows the daily demand amongst vacationers and commuters for train tickets from Boston to New York. As the price increases from $50 to $100, who has the higher price elasticity of demand? Why might this group's demand be more elastic? Price of one-way ticket Quantity demanded (vacationers) /(commuters) $50 - 2,000 / 1,000 $100 - 1,500 / 800 $150 - 1,000 / 600

The vacationers. They are likely to have more flexible travel plans and therefore more elastic demand. The vacationers have a price elasticity of demand equal to 0.25, compared to 0.2 for commuters. This more elastic demand could be due to vacationers' more flexible travel schedules—the flexibility to travel at different times essentially gives the vacationers more substitutes.

Under its original offering, customers of media company Netflix were charged $9.99 for a service that included a one-DVD-at-a-time plan and unlimited streaming of movies. In July 2011, Netflix announced a change to its pricing policy. The $9.99 plan would be eliminated. Instead, consumers could choose one of three plans—$7.99 per month for one-DVD-at-a-time, $7.99 per month for unlimited streaming, or $15.98 for both DVD and streaming. In October 2011, Netflix announced that it had lost 800,000 subscribers in the U.S. during the third quarter of 2011. Which of the following MUST be true for all subscribers that Netflix lost in the third quarter? (Choose all that apply.)

Their WTP for streaming only is less than $7.99. Their WTP for DVDs only is less than $7.99. Their WTP for the two services together is less than $15.98.

This question builds on the previous one. Here is the information again: Under its original offering, customers of media company Netflix were charged $9.99 for a service that included a one-DVD-at-a-time plan and unlimited streaming of movies. In July 2011, Netflix announced a change to its pricing policy. The $9.99 plan would be eliminated. Instead, consumers could choose one of three plans—$7.99 per month for one-DVD-at-a-time, $7.99 per month for unlimited streaming, or $15.98 for both DVD and streaming. Although Netflix had expected to continue to lose subscribers in the fourth quarter of 2011, in January 2012 the company announced that it had instead added 610,000 subscribers by the end of that quarter. Which of the following MUST be true for the subscribers that Netflix added in the fourth quarter of 2011?

Their WTP for streaming only is more than $7.99. Their WTP for DVDs only is more than $7.99. Their WTP for a bundle is more than $15.98.

If a product has four features, and each feature takes on four different values, how many alternatives

There are 4*4*4*4 = 256 alternatives.

A product has a price elasticity of demand of 0.6, which means that:

Total revenue increases when the price increases. The price elasticity is less than 1, which shows that the percentage change in quantity demanded will be less than the percentage change in price.

You walk into a small grocery store with a list of 4 items to purchase. Having found every item on your list, you decide to purchase only 3 items: milk, cereal, and a pound of bananas. We can conclude that your willingness to pay for the other item was less than its price.

True If your WTP for the item were higher than its price, you would have purchased it. You may have decided not to purchase the item because it wasn't the brand you like, or you remembered you already had the item at home, or for some other reason—but any of those reasons would lower your WTP for the item.

A manufacturing company has seen a decline in its physical sales over the past few years, leaving a portion of its fixed infrastructure underutilized. What are some reasonable measures the company could potentially take to maintain its profitability? Select all that apply.

Try to cut fixed costs in other areas where possible Rent out the underutilized space to other companies for additional revenues

Which of the following are fixed costs incurred by a theme park, and which are variable?

Variable: COSTS OF FOOD AND DRINK HOURLY WAGES FOR CLOWNS AND CARTOON CHARACTERS Fixed MAINTENANCE OF RIDES AND ATTRACTIONS COST TO BUILD A NEW FUN HOUSE SALARIES OF LAWYERS ADVERTISING COSTS

Jim Holzman at Ace Ticket has a few premium seats in the front row. He would like to find out how much extra he can charge for those tickets, relative to identical seats right behind in the second row. To do so, he decided to run a survey. Which of the following questions is LEAST likely to elicit an honest answer?

What is the most you would be willing to pay for front row seats? Survey respondents have a strong incentive to lie if asked directly what their WTP is.

In which of the following situations does a focus group have an advantage over a traditional survey? Select all that apply.

When gathering granular, personalized information on a few customers When the question or topic is likely to be misunderstood by respondents

A large beer company previously had a yearly budget of $50 million per year for advertising but increased the budget to $60 million in order to run a commercial during the Super Bowl. That year revenues increased by 1%. Should the beer company continue with the increased advertising budget?

Yes, but only if the increase in revenues was greater than the increase in expenditures. If the original total revenue was $1 billion, then the increase in revenue would have been 1% of that, so $10 million. This is equal to the increase in advertising expenditures. Thus if original revenues were greater than $1 billion, it makes sense to keep the increased budget.

Part-worths refer to:

an implied numeric value that users attach to each feature of a product.

For a company facing a linear demand curve, revenue is maximized:

midway down the demand curve.

A heavy snowstorm is predicted to occur in Boston on the same night as the city's professional basketball team is playing a game. The snowstorm, if it occurs, will make it difficult for people to drive into the city. In anticipation of lower demand, the arena lowers the prices of tickets to the game. When compared to quantity demanded in the absence of the storm and the price change, the new quantity demanded:

cannot be determined. The bad weather shifts the demand curve to the left, lowering quantity demanded. At the same time, the price decrease moves quantity demanded to the right along the new demand curve. Depending on the size of the relative effects, the new quantity demanded could be higher, lower, or the same as before.

An art collector is bidding on a statue that would complete a collection he is trying to assemble. The statue is being sold in a Vickrey (sealed second-price) auction. The collector should place a bid:

equal to his willingness to pay for the statue. (This maximizes the chances of the collector winning the auction without creating any risk that he will overpay.)

Conjoint analysis is particularly useful because (select all that apply):

it's an efficient way to assess customers' relative preferences for product features. it can be used for customer segmentation. it can be used in product development decisions.

A company that wishes to maximize revenue should try to:

set the price where elasticity of demand will be equal to 1. Revenue is always maximized at prices where the elasticity of demand is equal to 1.