# Using the Marginal Approach

Problem 1: Using the Marginal Approach (40 points)Suppose your company runs the shuttle business for a hotel to and from the local airport. The costs for different customer loads are:
1 customer:  \$30
2 customers: \$32
3 customers: \$35
4 customers: \$38
5 customers: \$42
6 customers: \$48
7 customers: \$57
8 customers: \$68.  What are your marginal costs for each customer load level? If you are compensated \$10 per ride, what customer load would you choose?

Problem 2: Elasticity and Pricing (40 points)Suppose the number of firms you compete with has recently increased. You estimated that as a result of the increased competition, the demand elasticity has increased from –2 to –3 (i.e., you face more elastic demand). You are currently charging \$10 for your product. What is the price that you should charge if demand elasticity is -3?

Problem 3: Price Discrimination (40 points) An amusement park, whose customer set is made up of two markets, adults and children, has developed demand schedules as follows: Price(\$)/Quantity for Adults/Children
\$5/5/20
\$6/14/18
\$7/13/16
\$8/12/14
\$9/11/12
\$10/10/10
\$11/9/8
\$12/8/6
\$13/7/4
\$14/6/2
The marginal operating cost of each unit of quantity is \$5. Because marginal cost is a constant, so is average variable cost. Ignore fixed costs. The owners of the amusement part want to maximize profits. Calculate the price, quantity, and profit if:The amusement park charges a different price in each market.The amusement park charges the same price in the two markets combined.Explain the difference in the profit realized under the two situations.

Problem 4: Bundling (40 points) Time Warner could offer the History channel (H) and Showtime (S) individually or as a bundle of both.Suppose the reservation prices of customers 1 and 2 (the highest prices they are willing to pay) are presented in the boxes below.The cost to Time Warner is \$1 per customer for licensing fees. Preferences ShowtimeHistory Channel.
Customer 1: 9,2
Customer 2:3 ,8
Should Time Warner bundle or sell separately?Should Time Warner bundle if everyone likes Showtime more than the History channel (i.e., preferences are positively correlated).Suppose Time Warner could sell Showtime for \$9, and History channel for \$8, while making a Showtime-History bundle available for \$13. Should it use mixed bundling (i.e., sells products both separately and as a bundle)?

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