1) You run a small company that provides regular pool service to customers in East Dallas. Like your competitors in the pool service business, you provide pool service 4 times per month but invoice customers for service on a monthly basis. When you raised the monthly price of pool service from $125 to $140, you lost 28 customers, leaving you with 90 pools to service. You believe that your demand curve has constant elasticity and has not shifted since you started your business. a. Estimate your elasticity of demand? b. Given the cost of pool chemicals, gas, wear and tear on your truck and your time, you believe that the marginal cost of servicing an additional pool in East Dallas is $75 per month. What can you say about your optimal price? Was it a good idea to increase your price? Over time, you realize that half of your 90 customers appear to be more price sensitive than the other half. You know that your customers communicate with each other and would be unhappy knowing that they are paying different prices for the same service. However, in talking with your price sensitive customers, it is clear that they would consider paying for less frequent service if the price were right. In fact, your less price sensitive customers would be willing to pay $190 per month for the current (4 times per month) service and $150 per month for reduced service (3 times per month). The more price sensitive customers are only willing to pay the current price of $145 per month for the current (4 times per month) service, but would be willing to pay $120 per month for reduced (3 times per month) service. The marginal cost of current (4 times per month) service remains $75 per month, while the marginal cost of the reduced (3 x per month) service package is $60 per month. c. What type of price discrimination are you considering engaging in? Explain your answer. d. What is your incentive constraint? e. What is your optimal pricing strategy and resulting profits? Be sure to prove your answer
1) You run a small company that provides regular pool service to customers in East Dallas. Like your competitors in the pool service business, you provide pool service 4 times per month but invoice customers for service on a monthly basis. When you raised the monthly price of pool service from $125 to $140, you lost 28 customers, leaving you with 90 pools to service. You believe that your demand curve has constant elasticity and has not shifted since you started your business. a. Estimate your elasticity of demand? b. Given the cost of pool chemicals, gas, wear and tear on your truck and your time, you believe that the marginal cost of servicing an additional pool in East Dallas is $75 per month. What can you say about your optimal price? Was it a good idea to increase your price? Over time, you realize that half of your 90 customers appear to be more price sensitive than the other half. You know that your customers communicate with each other and would be unhappy knowing that they are paying different prices for the same service. However, in talking with your price sensitive customers, it is clear that they would consider paying for less frequent service if the price were right. In fact, your less price sensitive customers would be willing to pay $190 per month for the current (4 times per month) service and $150 per month for reduced service (3 times per month). The more price sensitive customers are only willing to pay the current price of $145 per month for the current (4 times per month) service, but would be willing to pay $120 per month for reduced (3 times per month) service. The marginal cost of current (4 times per month) service remains $75 per month, while the marginal cost of the reduced (3 x per month) service package is $60 per month. c. What type of price discrimination are you considering engaging in? Explain your answer. d. What is your incentive constraint? e. What is your optimal pricing strategy and resulting profits? Be sure to prove your answer
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:1) You run a small company that provides regular pool service to customers in East Dallas. Like
your competitors in the pool service business, you provide pool service 4 times per month but
invoice customers for service on a monthly basis. When you raised the monthly price of pool
service from $125 to $140, you lost 28 customers, leaving you with 90 pools to service. You
believe that your demand curve has constant elasticity and has not shifted since you started
your business.
a. Estimate your elasticity of demand?
b. Given the cost of pool chemicals, gas, wear and tear on your truck and your time, you
believe that the marginal cost of servicing an additional pool in East Dallas is $75 per month.
What can you say about your optimal price? Was it a good idea to increase your price?
Over time, you realize that half of your 90 customers appear to be more price sensitive than the
other half. You know that your customers communicate with each other and would be unhappy
knowing that they are paying different prices for the same service. However, in talking with your
price sensitive customers, it is clear that they would consider paying for less frequent service if
the price were right. In fact, your less price sensitive customers would be willing to pay $190 per
month for the current (4 times per month) service and $150 per month for reduced service (3
times per month). The more price sensitive customers are only willing to pay the current price of
$145 per month for the current (4 times per month) service, but would be willing to pay $120 per
month for reduced (3 times per month) service. The marginal cost of current (4 times per month)
service remains $75 per month, while the marginal cost of the reduced (3 x per month) service
package is $60 per month.
c. What type of price discrimination are you considering engaging in? Explain your answer.
d. What is your incentive constraint?
e. What is your optimal pricing strategy and resulting profits? Be sure to prove your answer
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VIEWStep 5: Explain what is your incentive constraint?
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