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Answers to Back-of-the-Chapter Problems
1. The fact that increased sales coincided with higher prices does not
disprove the law of downward-sloping demand. Clearly, other factors
c. EP = (dQ/dP)(P/Q). At P = $80, EP = (-1.5)(80/60) = -2; At P = $100,
b. EP = (dQ/dP)(P/Q) = (-1,200)(1.50)/2,400 = -.75.
c. Since demand is inelastic, McPablo’s should raise prices, increasing
b. Because each firm’s output is one-fourth of the total, the individual
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c. Using the formula %Q = (EP)(%P) with EP = -1.5 and %Q = 9
5. The consultant should recommend an immediate price increase. As
6. a. This means that if the local population increases by 10 percent, ticket
b. The 10 percent increase in ticket price implies a (.6)(10) = 6 percent fall
c. Here, the increase in total revenue per admission (from $18 to $19) is
7. a. i. In pricing Triplecast, NBC faced a pure selling problem, the marginal
cost of each additional subscriber being insignificant.
ii. Unfortunately, management dramatically misjudged its demand
curve as well as the point of maximum revenue along it. Once it
recognized the depressed state of demand, management instituted a
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b. i. The main benefit of AOL’s new pricing plan was attracting new
customers. The company raised its customer base over 18 months from
8 million to some 11 million subscribers. It also increased revenues
ii. This is exactly what happened. Current customers more than doubled
their daily time on-line. Constrained by a fixed capacity, AOL’s system
overloaded. Customers received busy signals and experienced
8. a. During this period, Mac computers, although technologically superior,
were priced out of the range of many consumers. As a result of vigorous
competition in the IBM PC clone market, prices of PCs were
b. Using the markup rule, we can see that with a price elasticity of -4 the
profit-maximizing markup is 25% (expressed as a percentage of price).
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c. It does make sense to concentrate in niche markets where demand may
be less elastic and Apple already has significant market share.
Likewise, software (and even hardware) that make Apple compatible
9. a. With demand given by P = 30,000 - .1Q and MC = $20,000, we apply
the MR = MC rule to maximize profit. Therefore, MR = 30,000 - .2Q =
b. According to the markup rule (with MC = $20,800 and EP = -9), we find
c. This is a pure selling problem (the trucks have already been produced)
so the goal is to maximize revenue. Setting MR = 0 implies 30,000 –
10. The key point here is that the optimal prices in summer and winter
depend upon the relative elasticities. Higher winter prices are warranted
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11. If a firm can identify market segments with different elasticities, it can
profit by charging different prices (even though marginal costs are the
12. How should the manager set prices when facing different levels of
costs? The answer is to apply the markup rule: P = [EP/(1 + EP)]MC. For
instance, if changes in economic conditions were to cause the firm’s
13. a. The garage owner should set prices to get the maximum revenue from
the garage. The owner should offer higher hourly rates for short-term
b. Start by setting MR = 0 for each segment. (This maximizes revenue in
each separate segment.) The resulting optimal quantities are QS = 300
c. Because there are only 400 places in the garage, the strategy in part b is
not feasible. The best the operator can do is to fill up the garage and
maximize revenue by ensuring that the marginal revenue is the same for
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14. a. Frequent flier and frequent stay programs are primarily designed to
in-duce strong allegiances and repeat business. It is also a subtle way of
b. Discount coupons deliver lower prices to the most price sensitive
c. A guarantee to match a lower price is a way of winning sales from
Discussion Question
a. With all farmers producing bumper crops (10% greater output), price is
driven down. If market demand for the crop is inelastic, the percentage
b. Suppose that average court costs per case fall. One effect will be that
more cases are brought to court. If the percentage increase in cases
c. Here, the adverse feedback effect occurs over time. Other things equal,
more numerous boats and the potential to catch more fish per boat
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d. Low-tar and low-nicotine cigarettes (because they might be perceived as
“safe”) could actually spur some individuals to smoke or some current
Spreadsheet Problems
S1. a. and b. Using the constructed spreadsheet, vary price in cell B7 until the
markup rule is satisfied – that is, cells E12 and F12 are equal. The
S2. a. and b. Using the spreadsheet, we optimize total revenue by maximizing
cell E13 (equivalently E18) by changing cells C9 and D9 subject to E9
c. If the airline sets a single “value fare”, solve the spreadsheet by
including the constraint that price cells C11 and D11 must be equal.
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S3. a. The MC per seat is $20,000 per plane divided by 200 seats per plane, or
$100. Setting MRB = MRT = 100, we have 540 – QB = 100 and 380 - .
b. and c. It is straightforward to confirm the algebraic solution using the
Appendix Problems
1. a. Steep indifference curves mean that numerous units of Y must be gained
b. The optimal bundle (at the new tangency) will consist of numerous units
b. To portray X as an inferior good, draw the new, higher indifference
3. If one pivots the budget line so that PX/PY falls (X becomes cheaper),
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