Managerial Economics Chapter 12

The aggregate demand for both goods is less elastic than the demand for the individual goods.

Explanation: the aggregate demand for substitute products is less elastic than the individual demands.

less elastic.


Explanation: when promotion makes demand less elastic, the right response is to increase price.

Pricing

Explanation:
pricing often responds to changes in demand brought about by promotions

Repositioning a product so that it does not directly compete with the substitute.

Explanation:
If consumers do not perceive the products as substitutes, then cannibalization is reduced.

more elastic than the individual demands.

Explanation: shoes and laces are complements and aggregate demand of complements is more elastic than the individual demands.

Compliments.

Explanation:
when acquiring a complement, prices on both goods should be lowered.

If MR > MC at capacity, then the firms should price to fill capacity.

Explanation: when MR>MC, it is optimal to reduce price to sell more, but one cannot sell more than capacity allows.

raise price from $10 to $15.00.

Explanation: using the formula (P-MC)/P=1/|e|, prices rise by 50%.

The promotional expenditures made the demand for the advertised products more elastic.

Explanation: promotional activity that makes demand more elastic should be accompanied by a decrease in price.

smaller; underprice

Explanation: since the costs of underpricing are smaller, one should underprice.

Because demand is elastic, a decrease in price will likely increase revenues and (since marginal cost is zero) will increase profit. Therefore, it is unlikely that the lot is optimizing. However, one should investigate how variable is demand. If the lot is 80% full each day, then decreasing price will be optimal. On the other hand, if the 80% capacity figure is because the lot is at capacity on weekdays but nearly empty on weekends, then prices might actually be too low. A price reduction would not increase the number of customers on weekdays, and a price increase may nevertheless keep the lot at capacity.

The stadium parking lot has fixed capacity. This means that the marginal costs, after construction costs were sunk, are near zero up to capacity and extremely high once capacity is met. On typical game days, the marginal revenue at capacity is likely to be between these two values. This implies a simple strategy of pricing low enough to fill the lot but high enough that you do not have to turn away many customers.For the Super Bowl, demand may be much higher as many fans will arrive to 'tailgate' during all of the planned activities with no intension of attending the game. The strategy is similar to game days, price low enough to fill the lot but high enough that very few people are turned away. However, the greater demand implies that this price is likely to be much higher than on regular game days. For smaller events, demand will be so low that capacity will never be reached. Put differently, the only way to fill the lot is to set the price so low so that marginal revenue for the last few spots is likely to be negative. In this case, efficient yield management ignores the capacity constraint and focuses on equating marginal revenue with short-run marginal costs. Typically, this will mean that price is above short-run marginal costs.One final consideration is that stadium parking and stadium tickets may be complements. That is, lower parking prices may increase demand for game tickets. If these are commonly owned, the optimal price for parking may be somewhat lower than indicated above.

They are likely trying to take advantage of psychological pricing. Since managing price expectations is as important as managing price, focusing consumers on higher prices initially allows consumers to perceive a discount, or a "win," when they later encounter the less expensive items. By setting the reference price higher, they are making consumers more likely to buy the items in the back when they do confront their prices.

When Apple made it difficult for third-party developers, it produced both hardware and software and profited both from the sale of the computers and from the sale of software for those computers. Since the hardware and software are complements, Apple priced each below its stand-alone profit-maximizing price. With the iPhone, Apple encourages third party developers. As the software apps produced by these developers are complements to the iPhone, they make the iPhone more valuable, allowing Apple to raise its price. The relative value of the two strategies depends on how complementary software is to the hardware and the relative ability of third-party developers relative to Apple.

Before illegal downloading, concert prices were kept low to help sell recorded music; concerts and recorded music were jointly-priced complements in demand. After illegal downloading became more prevalent, profits from record sales fell dramatically, so performers' profit calculus changed. It was as if they were pricing concerts independently of their effect on recorded music sales. Formally, the marginal revenue of concert sales fell due to illegal downloading, and concert prices increased in response.

Music radio stations and concerts tend to be complements in consumption. The radio station can easily promote the concert and the concert venue will advertise the station. When a firm owns complements, it tends to reduce prices for both. In this case, after spinning off a complement, the opposite should happen, and the prices of each should rise.