Microeconomics Problem Set 2 Analysis
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ffsMicroeconomics Problem Set 2 Analysis
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ffs- Problem Set 2
- Problem 2: Super Computer Pricing
- Problem 3: Mrs. Smyth's Demand
- Data Tables
Common questions
Powered by AIIn the US market, the demand function for the pharmaceutical product is given by QA = 2,000,000 – 20,000PA, indicating a higher sensitivity to price changes compared to the Brazilian market, where the demand function is QB = 3,000 – 200PB. The greater slope in the US demand curve suggests that sales will respond more significantly to price changes, necessitating careful optimization of prices to balance revenue and market penetration. The company would need to charge lower prices in markets with higher price sensitivity to maintain sales volumes .
The coefficient of determination (R²) measures how well the estimated regression equation accounts for variation in pie sales. A high R² value, close to 1, suggests that factors in the regression model, such as price, advertising, and competitors' pricing, explained most of the demand variation, indicating predictability. Conversely, a low R² would suggest unpredictable demand or omitted variable bias .
Super Computer, Inc. should charge business customers a higher rental and usage fee compared to academic institutions, due to the higher demand function (Q=10-P) in businesses. Specifically, charge a rental fee plus usage fee above the marginal cost for businesses, potentially setting P close to the intersection of marginal revenue and cost. For academics, a lower fee reflecting their demand (Q=8-P) ensures broader market capture while maintaining cost coverage .
The significant price difference between the US and Brazilian markets can lead to parallel imports, where products purchased at lower prices in Brazil are resold in the US market, undermining the company's pricing strategy. This arbitrage is facilitated by the ease of moving pharmaceuticals between countries, potentially leading to lost revenue and market disruptions in the higher-priced US market .
Super Computer, Inc. should set a usage fee that maximizes joint profit across both customer types, finding a rate that equates the sum of their marginal revenues to the marginal cost of 2 cents per second. Calculate the combined demand curve of both customer types and set a price where the total MR = MC. Leaving aside rental fees, focus on a pricing point that balances demand elasticity between the groups while exceeding marginal cost .
Management can leverage the regression analysis results by inputting hypothetical values for each determinant—price, advertising, competitor pricing, income, population, and trend—in new market conditions. The coefficients provide a predictive model to estimate sales by adjusting these inputs based on local market conditions. This exercise aids in understanding potential sales volumes, structuring promotional efforts, and setting competitive pricing strategies .
Each coefficient in the demand regression model represents the sensitivity of pie sales to changes in a corresponding variable. A positive sign on advertising expenditure implies that increasing advertising positively impacts sales; the magnitude indicates the sales volume change per dollar spent. Conversely, if the retail price has a significant negative coefficient, it suggests price reductions could substantially boost sales, guiding pricing decisions. Similarly, a competitor's price with a positive impact means competitive pricing can attract more customers .
The company should consider the cost of implementing uniform pricing versus the cost of monitoring U.S. clinics, which is $1,500,000 annually. Uniform pricing could lead to lost profits in markets willing to pay different prices and reduce competitiveness in price-sensitive regions. Monitoring, while costly, could protect higher US pricing by preventing arbitrage. The decision should weigh these financial implications, customer reaction, and potential loss of market share due to uniform pricing against the cost and effectiveness of the monitoring initiative .
Advertising expenditures, based on their positive coefficient from regression analysis, have a direct growth impact on unit sales. Assuming all other factors constant, increased dollars spent in advertising would enhance visibility and consumer persuasion, directly increasing sales volumes. By cost-effectively allocating $30,000 for advertising in the forecast, Mrs. Smyth can expect a proportional increase in forecasted sales, as derived from their regression model for this specific market .
To determine profit maximization at the price of $7.20, Mrs. Smyth should calculate and compare the marginal revenue (MR) at this price to marginal cost (MC). If MR equals MC, the price is optimal. Additional factors include demand elasticity—if demand is inelastic, prices above $7.20 may yield higher revenue. It's crucial to assess if any unaccounted factors could affect elasticity or cost structures, influencing the optimal price point .
