Week 4- Pricing decisions with simple and complex costs

Question 1

The tesla roadster had high average costs. Should Tesla of lowered the price of the car or raised it?

Answer 1

Lowered it to lure in more customers which would have spread the cost over a greater quantity of customers. Therefore MR cant be above AR

Question 2

what is consumer surplus?

Answer 2

value perceived by customer - the actual price paid by the customer

Question 3

what is the demand curve?

Answer 3

the correlation between the price of a product to the quantity demanded by consumers

Question 4

what is aggregate demand?

Answer 4

the total of all the individual consumers demand curves to create the buying behaviour for a group of consumers

Question 5

what is the pricing tradeoff?

Answer 5

Lower prices: sell more but earn less on each unit

Raise prices: sell less but earn more on each unit

Question 6

If price elasticity of demand is < 1 is demand inelastic or elastic?

Answer 6

inelastic

Question 7

If price elasticity of demand is > 1 is demand inelastic or elastic

Answer 7

elastic

Question 8

how do you calculate price elasticity using the ARC technique?

Answer 8

(Q1-Q2/Q1+Q2) / (P1-P2/P1+P2)

Question 9

how do you calculate percentage change in revenue?

Answer 9

%change in price + %change in quantity

Question 10

If price elasticity is greater than 1, so its an elastic product , MR<0 therefore…

Answer 10

you may need to lower prices

Question 11

do products with close substitutes have inelastic or elastic demand?

Answer 11

elastic

Question 12

what is more elastic? an individual brand or industry aggregate demand?

Answer 12

an individual brand

Question 13

do products with many complements have less or more elastic demand?

Answer 13

less because it takes more effort from the consumer to switch all their products to another provider so they don mind paying extra for the convenience

Question 14

what is the first law of demand?

Answer 14

When e<0 (as price goes up, quantity demanded goes up) eg in poor countries when the price of rice increases consumers drop luxuries such as meat to afford rice so they buy more rice to substitute for the meat

Question 15

what is the second law of demand?

Answer 15

in the long run, elasticity increases. Alternatives come along as more things are innovated which means other things become less necessary

Question 16

What defines increasing economies of scale?

Answer 16

long-run average costs falling with output. this is what happened with the tesla roadster example

Question 17

what defines diseconomies of scale?

Answer 17

long-run average costs rising with output. This is what happens eventually due to scarcity of supply limiting your ability of expansion

Question 18

what are economies of scope?

Answer 18

where the cost of producing two products together is cheaper than producing them separately. Idea behind mergers

Question 19

what is the formula for economies of scope?

Answer 19

Cost (Q1, Q2)

Question 20

give an example of where diseconomies of scope is used

Answer 20

The production of one good has the potential to contaminate the other eg .nuts

Question 21

what si the formula for markup?

Answer 21

Price - marginal cost

Question 22

MC= MR is equivalent to what formula?

Answer 22

MC= P(1-1/e)=MR

Question 23

What is MC=P(1-1/e)=MR rearranged?

Answer 23

P= MC/(1-1/e)

Question 24

what is a good way of experimenting which direction a firm should change prices? and thus find its price elasticity

Answer 24

discounting the product for a temporary period of time