economics
A firm sells a smartphone. At a price of $500, there is only one customer. At prices above $500, no one purchases the phone. What is the firm's marginal revenue at a price of $500?
$500 Lowering the price of the phone from $501 to $500 will bring in one new customer, and $500 in new revenues. Since there are no customers who would buy the phone at any price higher than $500, the firm doesn't lose revenue on any inframarginal customers. MR = $500 - $0.
3 basic steps of a conjoint analysis?
1. Collect data from customers on how they would rank different combinations of features of the product. 2. Use this information to infer each customer's willingness to pay for each product feature. 3. Estimate how many customers would buy the product with particular features.
Which of the following would be least likely to increase unemployment? 1. A law setting a minimum wage below the market equilibrium wage. 2. A law requiring companies to give all employees 20 vacation days per year. 3. A law requiring companies to match employees' contributions to their 401k plans.
A law setting a minimum wage below the market equilibrium wage. Setting a price floor below equilibrium will have no impact on the market.
Say an airline has 100 tickets for sale for a flight from Boston to New York. At a price of $130, only 70 people would be willing to buy tickets. The airline would generate revenues of $9,100. The airline could, instead, offer the tickets for $115 and sell 80 of them. What is the airline's marginal revenue when it decreases price from $130 to price of $115?
Although the airline has gained $115*10 = $1150 in revenue from new customers, it has lost $15*70 = $1050 on the higher-WTP customers. A simpler way to look at it is that the firm made $9,100 at a price of $130, and $9,200 at a price of $115. The marginal revenue is the difference in revenue divided by the increase in tickets sold: $100/10=$10.
network business?
And as you draw in more buyers,you'll attract more sellers
Average costs=?
Average Cost = [[Total Fixed Cost] + [Total Variable Cost]]/[Total Quantity Produced]
auctions solve 2 problems in one go?
In principle, they solve two problems in one go: getting consumers to truthfully reveal their willingness to pay and setting prices
Think back to the lesson on exchange rates. When Texas Instruments decides to buy more of its inputs from a Chinese supplier, what happens to the price of renminbi (CNY) in US dollars? 1. CNY becomes cheaper 2. CNY becomes more expensive
CNY becomes more expensive
perfect competition?
Companies end up looking more or less similar, compete fiercely for customers,and have the same costs. In other words, the supply curve in the long run looks essentially flat. And in that case, no firm makes any profits. This is what we typically call perfect competition.
The increasing prevalence of online video streaming has caused increased demand for fast internet connections. What impact will this have on the market for electrical engineers?
More engineers will be hired at higher wages. Companies that manufacture networking equipment will need to hire more employees, increasing demand for engineers.
The slope of a curve depends on? Change the ? and you change the slopes. What do we use instead?
The slope of a curve depends on the units of measurement. Change the units and you change the slopes. It's called the elasticity of a curve. Conceptually, the elasticity is very similar to a slope measure—it measures the responsiveness of quantity demanded to changes in some underlying factor (like price).
total value created?
WTP - WTS
When to be similar to competitors? different?
When your competitors can't easily respond to your moves, it can indeed pay to be similar to them. However, when your competitors can respond quickly, then similarity almost never pays: it's important then to be different.
bundling can be powerful even when products are unrelated in use—as long as?
different consumers have different preferences for the two products.
efficiency vs equity?
efficiency (that's concerned with value maximization) and equity (that's concerned with value division)
A minimum wage is more likely to increase unemployment if the labor supply is: 1. elastic 2. inelastic
elastic. An elastic labor supply would mean employees would want to work many more hours if wages increased slightly. This would make a price floor more likely to lead to a surplus of labor.
Is there excess demand or supply for labor at a wage above w*, where w* is the equilibrium wage?
excess supply
do fixed costs impact optimal price?
fixed costs have no effect on the optimal price. (Remember, the reason is that fixed costs affect neither a firm's marginal revenue nor its marginal cost.)
Consumers bear more of the incidence of a tax when demand is: 1. more elastic 2. less elastic
less elastic When the demand curve is steeper, or more "inelastic," consumers will bear large price increases, and will end up "paying" a greater portion of the tax.
Firms bear more of the incidence of a tax when supply is: 1. more elastic 2. less elastic
less elastic When the supply curve is steeper, or more "inelastic," suppliers will end up "paying" a greater portion of the tax.
willingness to pay
maximum price you are willing to pay for a product or service
willingness to sell?
opportunity cost of suppliers the lowest price at which a supplier is willing to sell you their inputs
economic cost is often used interchangeably with?
opportunity cost, and refers to all costs incurred in a particular decision
what is the cross-price elasticity of demand when two products are substitutes? complements?
positive, negative
what is not a factor that shifts the demand curve?
price
two-part tariff?
set its per-unit price equal to its cost and then charge a lump-sum fee on top of that which captures all of the consumer's surplus
second-degree price discrimination?
practice of charging different prices per unit for different quantities of the same good or service
A price ceiling setting the maximum price of bread below the equilibrium price will result in a: 1. new equilibrium price 2. surplus of bread 3. shortage of bread
shortage of bread. At below-market prices, suppliers will not want to produce as much bread as consumers will want to purchase, leading to a shortage.
The question of "how low you're willing to price" is one of the most important questions in business. It depends on?
variable costs
excess demand?
when quantity demanded is more than quantity supplied
4 considerations in when it might be better using an auction than other types?
1. To start, there's the issue of how informed sellers are about buyer valuations: if the seller knows a lot about WTP, there's a far better chance he knows what price to directly set. On the other hand, the less information he has about the demand curve, the more sense it makes for a seller to run an auction. 2. A second consideration when deciding whether an auction is likely to generate more revenue than a fixed-price sale is the time it takes. 3. Third, another important consideration is how different the buyers' WTPs are. Remember the revenue equivalence result? An auction will generate more revenue (and will be more likely to do better than a fixed-price sale) if the buyers' valuations are relatively close together, since the highest WTP and the next-highest WTP will be close together. As a result, an auction will lead the highest bidder to bid closer to his true valuation. If there are large differences in WTP across buyers, an auction may not be particularly effective in driving up prices. 4. Fourth, we already saw that several different kinds of auctions all yield practically the same revenue if buyers' valuations are private, but that some types are more effective (for the seller) than others when the various buyers' valuations are interconnected.
3 advantage of focus groups? 3 disadvantages of focus groups?
1. the advantage of a focus group is that you can ask follow-up questions—in real time 2. IDENTIFY COMPETITORS YOU HADN'T BEEN AWARE OF 3. TO REDUCE CONSUMER MISREPRESENT-ATION OF WTP 1. Focus groups can yield rich qualitative data, but surveys have an advantage of large-sample quantitative data that can be more easily analyzed. 2. Focus groups are much more time-consuming than a simple survey. 3. Furthermore, it requires more skill, training, and experience to run them well.
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? 1. A t-shirt company that sells 25% of the t-shirts in the market 2. An online social network preferred by 30% of consumers 3. A car manufacturer with 25% market share 4. A household appliances store that serves 35% of the market
2. An online social network preferred by 30% of consumers
A relatively inelastic supply curve implies that? demand curve?
A relatively inelastic supply curve implies that small demand shocks will result in large swings in prices for firms. But it also implies that the most efficient firms capture a lot of surplus, while others capture very little. Conversely, a relatively inelastic demand curve will result in large swings in prices with small changes in supply, but will also mean that some high-WTP buyers capture a lot of surplus.
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? 1. A survey of your customers asking which of your products they like best 2. A survey of your customers asking which products they would like to see more of 3. A survey of local teenagers asking how they choose which products to purchase 4. A survey of a representative slice of the general population asking which types of products they prefer
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.
A big technology company has decided to move one of its main offices to a new state, and is building a large office building there. What will be the impact on the market for office furniture and the market for apartment rentals?
Apartment rents and furniture prices will both increase. The new office building will require furniture, and employees relocating to the new office will need somewhere to live, increasing demand for both apartments and office furniture.
The table below shows a Red Sox fan's demand for tickets to a game: Price Quantity Demanded $100 1 $90 3 $80 3 $70 5 $60 5 which of the following statements is true? 1. Willingness to pay for a 6th ticket is 0 2. Willingness to pay for the 1st ticket is $90 3. Willingness to pay for a 2nd ticket is $90 4. Willingness to pay for a 4th ticket is between $70 and $80
At $80, the fan does not buy a 4th ticket, thus their willingness to pay for a 4th ticket is less than $80. At $70, the fan does buy a 4th ticket (and 5th ticket), thus their willingness to pay for a 4th ticket is at least $70, but could be higher. Thus their willingness to pay must be between $70 and $80.
badmouthing seems well-suited to political advertisements because?
Badmouthing seems well-suited to political advertisements because, in large part, an election is a classic zero-sum game. There is a fixed number of registered voters and only one candidate can win. The votes that one candidate gets come directly at the expense of the others. Furthermore, in many elections, there are often only two strong competitors, so if one candidate attacks the other in an ad, the attacker is likely going to benefit.
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.
what is a substitute? In terms of buyer WTP what this means is that two products A and B are substitutes if? (equation)
Customers value your product less when a substitute product exists than when it does not. A decrease in the price of a substitute reduces demand for your product. WTP(A+B)<WTP(A)+WTP(B)
in a graph with a price ceiling, which region represents the producer suprlus and also revenues? consumer surplus?
D is producer surplus, and D+E+F is revenue. A+B+C C is not captured by consumers or producers, but represents surplus that could have been captured under normal market conditions.
Economic profits?
Economic profits are the profits of a business when its costs are measured according to the "economic" way: that is, accounting for opportunity cost, ignoring sunk cost, and so on.
A recent increase in the frequency of apartment fires has led many landlords to ban the use of candles. What effect will this have on the market for candles?
Equilibrium price and quantity will both decrease. Since demand for candles has decreased, the market outcome will be at a lower price and quantity than before.
Even though the Vickrey auction is very different from the open outcry auction, in both cases?
Even though the Vickrey auction is very different from the open outcry auction, in both cases, the revenue is roughly equal to the second-highest willingness to pay.
There are three parts to relative cost analysis?
First, understanding your costs. Second, estimating your competitor's cost—which can require a fair amount of creative or "detective work," as Professor Rivkin describes. Third, using the relative cost estimates to explore how decisions are affected. These could be decisions about whether or not to enter a business (are your costs low enough), about whether you can compete in a price war, about where your advantage really comes from, and so on.
But what factors determine whether the demand curve for a product is steep or flat?
For one, it depends on whether the product has close substitutes or not. Chocolate ice cream has a lot of close substitutes (cookie dough ice cream, chocolate cake, other desserts). If the price of chocolate ice cream suddenly rises, consumers will simply switch to the other products. Baby formula on the other hand has few close substitutes. Secondly, it depends on whether the product is a necessity or a luxury. Chocolate ice cream is a luxury good. (That is, despite what some of us may think, we can live without it.) On the other hand, baby formula is considered a necessity. Even if its price rises, consumers will continue purchasing it. Finally, the time horizon also matters. Consider the demand for gasoline. In the short run, the demand curve for gasoline is quite steep—there are few substitutes and, for many people, driving is a necessity. But over time, people can move closer to work, we can discover alternate fuels, etc. This can cause the demand curve for gasoline to flatten out in the longer run.
There are various reasons why the seemingly most efficient plants don't expand capacity and take over the entire market. list 2?
For one, it might be that their upfront fixed costs in doing so are very high. Remember, the supply curve only captures variable cost (or "marginal cost")—that's alright when considering production, but when considering entry or expansion one needs to cover fixed costs too! Another reason is that maybe their plant variable costs are higher when they expand capacity—so that variable costs are not the same for all production levels. Or it might be that even if they expand capacity, other firms may not exit (for example, if they're state run).
Which of the following pairs of products would have a cross-price elasticity of demand that is negative? (Select all that apply.) 1. High-speed internet access and an online streaming service for TV shows 2. Jelly and jam 3. Dishwashers and houseplants 4. Pens and pads of paper 5. A Porsche 911 and a BMW i8 (both are luxury sports cars)
High-speed internet access and an online streaming service for TV shows Pens and pads of paper
Several resorts in Cabo San Lucas, Mexico have been competing fiercely for customers, and hotel prices are at all-time lows. What impact will this have on the market for hotels in Hawaii?
Hotel prices and the number of rooms booked will both decrease. Vacations in Mexico and vacations in Hawaii are substitute goods. If the price of hotels in Mexico has decreased, demand for hotels in Hawaii will decrease, leading to lower prices and lower quantities.
If a bidder's valuation for an item is influenced by how much others value it, then?
If a bidder's valuation for an item is influenced by how much others value it, then an auction that allows the bidding to be played out over time, such as the English auction, will typically generate more revenue than sealed bid auctions. Seeing others bid high for the item might convince you that the item is worth more than you thought and you might be willing to place a higher bid than you did at first.
You are trying to figure out the right price for a particular section of seats to an event. Your best guess of what customers are willing to pay for those seats is $100—but you're unsure about this guess. You have three days to sell those tickets. Where would you set the price? Set the price at $120 Set the price at $100 Set the price at $99 Set the price at $80
If you price the ticket at $120, there's a smaller chance of selling it—you'll sell it only if customer WTP is as high as $120 (and in that case, you've done really well). Even if no one buys it at that price, however, you've gained important information: a customer's WTP is not as high as $120. What can you do with this information? You can reduce the price incrementally to $110 and then to $100 until you sell the ticket. This method of pricing may delay the time it takes to sell, but it increases your ability to capture more value from the customer. As long as you have more time to sell, it's not a bad strategy.
There is one slight difference between English auction and Vickrey auction?
In a Vickrey auction, we actually get to learn all the participants' true valuations (including that of the top bidder).
Historically, a few major car manufacturers, located in country A, have supplied all the cars to country A and its neighbor, country B. Now, a new car manufacturer which can produce cars more efficiently has begun operating in country B. What will be the effect on the markets for cars in the two countries?
In both countries, the price of cars will decrease and the quantity sold will increase. The new car manufacturer will increase the supply in both markets. Even if the new manufacturer does not export cars to country A, fewer cars will need to be exported from country A to country B, leaving more cars available in country A.
a well designed experiment? 4
In summary, a well-designed experiment: 1. avoids confirmation bias 2. isolates key features of the hypothesis 3. focuses on the most important question 4. and avoids the problem of missing variables through randomization.
In the short-run, when considering whether to produce aluminum, what costs matter? In the long-run, and when considering whether to enter or exit an industry?
In the short-run, when considering whether to produce aluminum, variable costs are all that matter. In the long-run, and when considering whether to enter or exit an industry, fixed costs matter as well.
From your knowledge of cigarettes, would you guess that cigarette demand is fairly elastic or inelastic, relative to the demand for most other goods? 1. elastic 2. inelastic 3. average
Inelastic Due to the addictive nature of cigarettes, demand for them is relatively inelastic, meaning that customers are willing to bear large price increases without decreasing consumption.
A new art degree offered this year by a local university has brought many more art aficionados into a city. However, the local art museum's most famous collection has been loaned to another city for a year. What impact will this have on the market for tickets to the art museum?
Neither the effect on price nor the effect on quantity demanded can be determined. The new art program at the university will increase demand for admission to the museum, but the absence of the famous collection will decrease demand. The effect on price and quantity demanded will depend on the relative magnitude of these two changes.
Which of the following conditions could cause an industry to have a small number of firms? Select all that apply. 1. Low variable costs 2. Network effects 3. High customer willingness to pay 4. Low opportunity costs of entering the industry 5. High fixed costs
Network effects If a product exhibits network effects, the dominant suppliers in the industry grow more and more successful as existing customers draw in new customers. This leads to industries with a few large competitors rather than many small ones. High fixed costs High fixed costs can act as a barrier to entry. New firms will be less willing to enter an industry if they will have to incur large fixed costs in order to compete with incumbent firms.
An entrepreneur wants to open a new hotel. There is one other hotel operating in the region, and the entrepreneur has estimated that its costs per guest are approximately $50 per guest, of which $30 is variable cost. The entrepreneur forecasts that total costs per guest in the new hotel would be $42, of which $25 would be variable. Assuming consumers will be indifferent between the two hotels, should the entrepreneur open the hotel?
No The new hotel will have to charge at least $42 per guest to be profitable. However, the incumbent hotel will be willing to cut prices to $30.
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? 1. Introducing the new loyalty program in all of its regions of operation will boost sales in the future. 2. The new loyalty program has boosted sales among its test participants. 3. Sales to customers that did not opt into the loyalty program have decreased. 4. None of the above.
None of the above.
A popular new smartphone app is made available only on iPhones. What impact could this have on the market for Android phones?
Price and quantity sold will both decrease. The app will make Android phones relatively less desirable than iPhones, decreasing demand for them.
A mining company has discovered huge silver deposits in a previously unmined region. What impact will this have on the market for silver?
Price will decrease and quantity will increase. The new discovery increases the supply of silver, which leads to a higher quantity and a lower price.
Manufacturers of a type of cable used to charge electronic devices have improved the production process, reducing their costs. Meanwhile, a popular new e-reader that is compatible with the charger has been released. What is the effect on the market for the chargers?
Quantity increases, and the effect on price cannot be determined. The new manufacturing process increases the supply of the chargers, but the new e-reader increases the demand. Quantity will certainly increase, but the effect on price will depend on the magnitude of these two changes.
A Mexican restaurant in Boston uses tomatillos in many of its dishes, but must pay to ship them from another state where they are grown. The restaurant has recently begun serving a popular green enchiladas dish that uses tomatillos. Meanwhile, fuel prices have decreased. What impact will these changes have on the market for tomatillos in Boston?
Quantity will increase and the effect on price cannot be determined. The new dish will increase demand for tomatillos, and the decreased fuel prices will increase the supply of tomatillos. Quantity will certainly increase, but the effect on price depends on the relative magnitude of the two changes.
At a price of $890 per ton, at what capacity (or capacities) does it make sense for the Ghanaian plant to produce?
Since the price of aluminum is higher than variable costs, each ton of aluminum will earn more revenue than it will use up in cost. In this case, why not produce at full capacity rather than at partial capacity?
In an English Auction, at the end of the Auction, the seller knows?
The English auction, however, comes pretty close to revealing the buyers' willingness to pay. In fact, at the end of the auction, the seller knows exactly the willingness to pay of all buyers except one—the highest bidder.
conjoint analysis? 2 key elements?
The essence of conjoint analysis is to get customers to reveal their preference for different feature-combinations, but to do it in an efficient way There are two key elements of conjoint analysis. Pair-wise rankings: First, rather than ask a customer her preference across 27 (or more) different products, the conjoint approach requests a comparison only across two or three offerings at any one time. Infer values from rankings: Second, rather than asking a customer to fill out her dollar value for each feature-combination, in conjoint analysis we don't even need to ask her that. Instead, we infer the dollar value she might assign to any product based on her rankings.
"open outcry" auction? Vickrey auction?
The first type of auction we all know is the "open outcry" auction, where the auctioneer opens the bidding with a minimum price and then each bidder can increase his or her bid. This is also known as an English auction. A second common approach to auctions is where the bids are hidden. In a so-called Vickrey auction (named after Columbia University Professor William Vickrey), the highest bidder wins the item, but only pays the amount of the second-highest bid. For this reason, this type of auction is often referred to as a "sealed-bid second-price auction".
A shop near the ocean sells kites for people to fly on the popular beach nearby. Each kite costs the shop $10, $8 of which is variable costs (for materials and wages for the kite-maker). Another kite-maker wants to enter the market. The potential entrant can make kites for $7 each in variable costs, but adding in the cost of opening a store, the total cost per kite would be $10. Should the new kite-maker open a shop?
The kite-maker should open a shop only if customers will be willing to pay at least $2 more for the new kites than they are willing to pay for the existing kites. The new kite-maker should compare its total costs ($10 per kite) to the incumbent's variable costs ($8 per kite). Since the incumbent will be willing to lower its prices to $8, the new kite-maker should only enter the market if customers' WTP for the new kites is at least $2 higher than their WTP for the existing kites.
A new light bulb has been invented that uses much less electricity to produce the same level of illumination. What impact will this have on the market for electricity?
The price and quantity of electricity will both decrease. The new light bulbs will decrease demand for electricity, leading to lower price and quantity.
AdBlock is an extension available for internet browsers that allows the user to prevent online advertisements from being displayed. What effect would AdBlock have on the market for online advertising, if advertisers pay for advertising space, rather than for "clicks"?
The price for online advertising should decrease AdBlock would reduce demand for online advertising, and therefore the price of online advertising would decrease.
Which of the following are factors that can directly impact a consumer's WTP for a good? Select all that apply. 1. Price of the good 2. Price of substitute goods 3. Consumer income 4. Consumer age 5. Price of the inputs used to produce the good
The price of a good does not, by itself, change the willingness to pay for that good The price of the inputs of a good do not affect willingness to pay for that good. However, perceptions of the quality of a good may impact WTP indirectly.
After a designer's clothing line was featured on a popular TV show, the clothes have become much more popular. However, the designer's fabric suppliers have successfully negotiated to raise the prices of the fabric. What effect do these changes have on the market for the clothing?
The price of the clothing increases and the effect on quantity cannot be determined. Demand for the clothing has increased, but the supply curve has shifted left due to the increased costs. It is certain that price will increase, but the effect on quantity depends on the relative magnitude of these two changes.
Under which of the following circumstances would a minimum wage be least likely to lead to unemployment? 1. Demand for labor is very elastic 2. There is only one employer in the market 3. The minimum wage is set above the market equilibrium wage.
There is only one employer in the market If one firm is the only employer in a market, it may be capable of paying lower wages than its top "willingness to pay," since there are no other firms competing with it for employees. A minimum wage might increase wages while keeping them below the firms WTP, in which case it might not decrease the quantity of labor demanded.
An increase in the popularity of corn ethanol as a fuel increases the demand for corn around the world, causing the price to rise. What is the reason behind the higher price? 1. To meet higher demand, the industry relies more on less cost efficient producers of corn. 2. The opportunity cost for supplying corn is higher than before.
To meet higher demand, the industry relies more on less cost efficient producers of corn. As more corn is demanded, the additional corn will be produced by less efficient suppliers, and prices will increase to cover their costs.
A factory currently manufactures and sells 800 boats per year. Each boat costs $5,000 to produce. $4,000 of the per-boat costs are for materials and other variable costs, while the per-boat fixed costs (incurred on yearly rent, administrative, and other fixed costs) are $1,000. If boat orders increase to 1000 boats per year, how do per-unit costs change?
Variable costs are unchanged at $4,000 per boat and fixed costs fall to $800 per boat The $800,000 in fixed costs is now spread across 1,000 boats. This results in $800 in fixed costs per boat. Variable costs are unchanged.
what essentially happens when OP companies attract employees who are willing to work for less money?
What these companies effectively are doing is reducing the willingness to sell off employees.
decreasing demand for RMB and/or increasing supply for RMB results in?
increase in CNY/USD
the supply curve in the long run looks?
the supply curve in the long run looks essentially flat
the opportunity cost of using a resource measures
the value of the best alternative use of that resource
Why is total surplus maximized at the market equilibrium?
there is at least one transaction between a buyer and seller that didn't occur, but should have—since the willingness to pay of some buyer that's "left out" is greater than the willingness to sell of some firm that's "left out" as well
what is a sealed first-price auction?
this is exactly the same as the Vickrey auction, only now the winner really has to pay what she bid, not the second-highest bid
confirmation bias?
we have a hypothesis in mind and design experiments around this hypothesis, wasting our time seeking data to confirm it?
the Winner's Curse? only occurs when?
whichever buyer wins the auction is actually not doing well it only occurs when the market is for a common value asset - the thing you're bidding on is worth the same to everyone else
principle of revealed preference?
you're trying to infer what their willingness to pay is based on their past choices
Let's stick with the same smartphone producer from the previous example. If the firm reduces its price slightly, it finds that there are no additional customers willing to purchase a phone at $490, or $450, or $400, etc. At a price of $200, however, two new customers would buy the smartphone (in addition to the customer with a WTP of $500). What is the firm's revenue at a price of $200?
$600 There are three customers who each purchase the phone at a price of $200. Revenue = $200*3=$600.
What are certain common traps to watch out for in a relative cost analysis? 5
1. Assuming that "all is fair" in competitive intelligence 2. Not accounting for differences in product mix across businesses 3. Trying to get every cost point estimate right 4. Devoting equal resources to finding out the cost of every line item 5. Lumping together fixed and variable cost
What is the impact of downstream consolidation on our pricing analysis? 3
1. It makes the demand curve that Amgen faces more elastic. Since Amgen is dependent on the buyers, they have the power to threaten not to purchase at high prices. 2. Amgen is no longer a "price-setter" on a demand curve; instead, prices are determined through negotiation. When a firm has many buyers, it can typically set a price and force consumers to take it or leave it. If there is, say, only one buyer, the consumer and the producer have a similar degree of power and prices may be set through negotiation. 3. It reduces the prices that Amgen can charge for Epogen®.
Ultimately, a firm's willingness to pay for an advertisement is influenced by the advertisement's impact on sales and profits. And that's usually driven by three key metrics:
1. The total number of viewers of the advertisement 2. The share of "relevant" viewers (that is, those who would potentially buy the product). For a firm like Procter & Gamble, relevant viewers might be consumers who are in the market for products like diapers, hair color, laundry detergent, and beauty products. (You can immediately see why the number of "relevant viewers" is so large!). Similarly, for General Motors, relevant viewers are those people looking to purchase a car. 3. The probability that the advertisement convinces the relevant viewer to actually buy the product. This, of course, depends on the effectiveness of the advertisement.
3 ways advertising can work?
1. You might assume that all advertising is designed to persuade. The movie trailer you watched was probably that type of ad. 2. But advertising can also work by informing you rather than trying to persuade you. The car ad is mostly just putting information out where people can see it. J 3. A third way that advertising can work is by signaling quality to the customers.
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% 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.
Why exactly are prices different in a competitive market than for a monopolist?
A monopolist doesn't face the risk of a price war, so it can price higher and increase profits. A competitive firm would be undercut by its competitors if it raised prices.
where are profits maximized for a monopolist?
A monopolist should price at the point on the demand curve where its marginal revenue is equal to its variable (or marginal) cost. Profits are maximized when MR = MC. If marginal revenue is greater than marginal cost, you can increase profits by producing and selling an additional unit of the good. Note that the quantity produced is determined by the quantity at which MR = MC. The price is determined by the price on the demand curve that corresponds to this quantity.
when an incumbent is considering whether or not to produce, what do they consider? entrant?
As an incumbent considering whether or not to produce, you'd compare your variable costs to the variable costs of the least efficient producer. As an entrant considering whether entry is profitable, you'd compare your average costs to the variable cost of the least efficient producer.
how do competitive firms price differently than monopolists?
As you can see,they have much less to lose on inframarginal customers and much more to gain at the margin because their initial market shares are different.
The willingness to pay for the advertisement can be calculated simply as:
Average profit*expected increase in quantity demanded
How would fixed costs affect the optimal quantity produced by a monopoly versus a competitive firm? 1. Fixed costs reduce the optimal quantity and price of the drug for both competitive firms and monopolies. 2.Fixed costs reduce the optimal quantity and price for a monopolist, but not for a competitive firm. 3.Fixed costs reduce the optimal quantity and price for a competitive firm, but not for a monopolist. 4.Fixed costs have no effect on the optimal price and quantities produced for either a competitive firm or a monopolist.
Fixed costs have no effect on the optimal price and quantities produced for either a competitive firm or a monopolist. A monopolist's optimal price is not affected by the fixed costs it incurs. Also, in the short run, competitive firms are willing to price as low as their variable costs, regardless of what fixed costs are.
If first-degree (or "perfect") price discrimination is possible, which of the following statements are true? I. The dead-weight loss is equal to zero II. The consumer's surplus is equal to zero III. The producer's surplus is equal to zero
I and II With first degree price discrimination, the producer can price each item right at each individual consumer's willingness to pay. The consumer captures no surplus (it is all captured by the producer) and there is no dead-weight loss.
what's the real reason that we see this dead-weight loss?
It's a result of the assumption that the store's prices must be the same for every unit! In other words, if the store could charge a different price for every unit, there wouldn't be any dead-weight loss.
irrationality?
Paying more than your willingness to pay would be inconsistent behavior.
A ski resort 2 hours away from a major city has opened several additional chair lifts and ski runs, and record snowfall this season has led to a great skiing year. What impact does this have on the market for snow tires?
Price and quantity sold will both increase. The heavy snowfall will make snow tires more necessary for driving, and the additional ski runs and great skiing conditions will lead more consumers to drive through the mountains in the snow. Both of these circumstances will increase the demand for snow tires.
A DVD retailer has two customers, with different willingnesses to pay for the three DVDs it is offering. Customer A is willing to pay $20 for "The Avengers," $8 for "Frozen," and $12 for "Gravity." Customer B is willing to pay $16 for "The Avengers," $20 for "Frozen," and $10 for "Gravity." Each DVD costs the retailer $5. How should the retailer price the three DVDs?
Sell the three DVDs as a bundle at a price of $40 Both customers will purchase this bundle, resulting in revenues of $80 and costs of $30. Profits will be $50.
Two museums, the Natural History Museum and the Art Museum, are owned and operated by the same city. The city has discovered that most potential visitors to the museums fall into one of three categories: 40% of the visitors would be willing to pay $30 for admission to the Natural History Museum, and $15 for admission to the Art Museum 40% of the visitors would be willing to pay $20 for admission to the Natural History Museum, and $40 for admission to the Art Museum 20% of the visitors would be willing to pay $10 for admission to the Natural History Museum, and $15 for admission to the Art Museum How should the city price the admissions tickets in order to maximize revenues?
Sell the tickets as a bundle for $45 Imagine there are 100 potential visitors. 80 of them will purchase the bundle, resulting in revenues of $3600.
revenue equivalence result? applies to?
So the revenue in a sealed first-price auction is approximately the same as the revenue in the English auction or the Vickrey auction. In fact, this is a very general, and famous, result about auctions. (For natural reasons, it's called the "revenue equivalence result,") and it applies to every auction where each buyer's willingness to pay is independent of each other, or "private values" assumption.
value captured by buyers?
That's simply the difference between their willingness to pay and price.
the lowest price a plant will produce is?
The lowest price the plant would produce at is its variable cost of producing aluminum
two-part tariffs can also lead to 2 cons? why?
What you just saw is that two-part tariffs can also lead to inefficiency and "dead-weight loss" in a market—if preferences are sufficiently different across consumers. The reason? It may be that, at some point, reducing prices to attract the Low type consumer becomes too costly for the firm since it's losing more and more surplus on the High type consumer.
4 advantages of surveys? 3 disadvantages?
You can get large-scale data. You can survey a broad pool of consumers. You can elicit aggregate preferences. You can do it relatively cheaply. People often have a good reason to lie about their willingness to pay! we have no idea what this product is survey the wrong people
elasticity of a demand curve=?
[percentage change in quantity demanded]/[percentage change in price]
Competitive advantage comes from?
being different than others
When are revenues maximized?
elasticity of demand is exactly 1. there's a tradeoff you need to manage. You gain customers by lowering prices—but that reduces revenues on all your existing customers as well. In other words, you need to ensure that the revenue loss from existing customers will be more than offset by the revenues you gain from new customers. Simply put, it's a tradeoff between volume and profit. if demand is inelastic, it pays to raise prices. If it's elastic, it pays to lower prices. It's only where demand elasticity equals 1 that it doesn't pay to either raise or lower prices.
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: 1. less than his willingness to pay for the statue. 2. equal to his willingness to pay for the statue. 3. greater than his willingness to pay for the statue. 4. slightly above his estimate of what the highest bid from another participant will be.
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.
"perfect" price discrimination
first-degree price discrimination - charging each customer the maximum he or she is willing to pay for each unit
high fixed costs lead to a?
high minimum efficient scale of operation for a firm In other words, to produce efficiently, firms with high fixed costs need to spread those costs across a much higher output than firms with low fixed costs do.
cross-price elasticity of demand tells you?
how much the demand for a product changes if the price of some other product changes by a certain amount
In an unregulated, competitive market consumer surplus exists because: 1. some sellers are willing to take a lower price than the equilibrium price. 2. some consumers are willing to pay more than the equilibrium price. 3. some sellers will only sell at prices above equilibrium price (or actual price). 4. some consumers are willing to make purchases only if the price is below the actual price.
some consumers are willing to pay more than the equilibrium price. Consumer surplus is defined as the difference between equilibrium price and willingness to pay.
value captured by suppliers?
the difference between your cost, or what you pay your suppliers,and their willingness to sell
Diminishing marginal returns?
the idea that an individual's demand curve slopes downward, that willingness to pay decreases with each additional unit of the good
