BUSGR 510: HW 4: Due Saturday July 27th 1. Suppose an airline flying on the Charlotte - Chicago route has estimated the demand curves for three different types of customers: business (no advance purchase), leisure (7 day advance puchase), and discount (14 day advance purchase) travellers. They are: Business: P = 600 − Q and MR = 600 − 2Q Leisure: P = 500 − 2Q and MR = 500 − 4Q; Discount: P = 400 − 3Q and MR = 400 − 6Q. Assume there is only one class of service, hence the marginal cost of providing the service is equal for all customers and is $100. What prices will the airline charge to each of the three different segments of customers. (Hint: Set MR=MC for each class of travel). 2. The relationship between Price elasticity of demand andMarginal Revenue can be shown to be: MR = P _ 1 − _ 1 |e| __ There are two types of customers that come to the Barnegat Fish Company to have their signature crabcakes: An affluent group with a price elasticity of demand for crabcakes of e = −2; and a less wealthy type with a price elasticity of demand for crabcakes of e = −5. The restaurant wants to introduce a coupon to encourage more people to visit their restaurant. Thus every buyer pays the posted price of $P per crabcake but those who tender the coupon get a discount of $X off the posted price. If the Marginal Cost of a crabcake is $2.00, what is the price of the crabcake and what is the value of the coupon?(Set MR=MC). 1 3. Consider a model of two firms (Firm 1 and Firm 2)competing against each other and setting prices simultaneously. Suppose they have a choice of setting either P = $5 or P = $8. If both of them set the lower price they split the total profits of $44 equally(i.e. each of them gets $22). If they both set the higher price, they split the total profits of $82 equally(i.e. each of them gets $41). However, if one of them charges the lower price while the other firm charges the higher price, the lower price firm earns a profit of $60, while the other firm earns a profit of $14. The payoff matrix is given below. Does Firm 1 and 2 have a dominant strategy each? What is the Nash Equilibrium? Explain briefly. Strategies for Firm 2 $5 $8 Strategies $5 (22, 22) (60, 14) for Firm 1 $8 (14, 60) (41, 41) 4. In the figure below is an example of a sequential game. Find the equilibrium FIGURE 10-1 The GM-Ford SUV Game
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