Problem Set 2

problems are the background you will use on the exam, but please note you will NOT

provide this document in the exam and the questions here may not exactly be replicated on

the exam. Doing the problems will build your understanding. It is recommended that you

try these problems each week at the material is presented.

1) You are serving as the chair for your community’s annual wellness campaign. A key event is

the annual Walk 3k, Run 10k, Ride 20k event. The event is staged entirely by volunteers and the

goal is to attract community wide awareness of getting active as a key step to wellness. In other

words, the goal is not to raise money, but to prompt awareness. As the chair you set a financial

goal to breakeven on the one and only cost of the event, a fitness bag with the community seal

and the event moto, “I AM ON THE RIGHT TRACK!

The cost of the bags, which must be ordered in batches of 100, are:

a) Complete the table.

b) You will charge an entry fee of $15 per participant. Determine the breakeven

quantity of bags you must order. Remember orders must be in blocks of 100.

2) Your marketing department just undertook a major advertising campaign promoting the

quality of your Best Brand Bike Shorts-BBB Shorts. They have provided you with an estimate

of the success of the campaign stating that: “the price elasticity of demand has decreased from

-5.76 to -3.76.”

Before the campaign your price was $240 per pair of BBB Shorts. What should be

the new price?

Bags Fixed Cost Variable Cost Total Cost Marginal Cost

0 1700 0

100 1700 500

200 1700 1200

300 1700 2700

400 1700 5200

500 1700 9000

600 1700 15000

700 1700 23800

800 1700 36800

900 1700 55800

1000 1700 83000

3) Seven years ago, you started a cross-town delivery service. The service is an environmentally

friendly business and, given all the traffic congestion, you are also the fastest service in the city

since your entire crew are bicyclists. You have two types of service. You have a small parcel

service for anything that is flat and measures less than 11×17. You have a package service using

a 100 lb capacity bike trailer for anything weighting up to 10 lbs. As a way to introduce the new

package service when you implemented the small package service you charged the same price

for packages as parcels. You are now wondering if you should charge different prices for the

parcel and package service.

Complete the tables below and determine the best price strategy: price the services

differently in each segment; or continue the one price policy?

Combined Parcels & Packages

The Parcels Market

Price Parcels and Packages TR MR TC MC MR-MC Profit

100 50 1600

90 120 2300

80 190 3000

70 260 3700

60 330 4400

50 400 5100

40 470 5800

30 540 6500

20 610 7200

10 680 7900

Price Parcels TR MR TC MC MR-MC Profit

100 0 1150

90 50 1650

80 100 2150

70 150 2650

60 200 3150

50 250 3650

40 300 4150

30 350 4650

20 400 5150

10 450 5650

The Packages Market

What is the best pricing strategy? Demonstrate the difference in the profit from

each strategy.

4) You help couples book their perfect honeymoon. You currently offer plans for a cruise and

for a casino stay. Your sale manager is getting her MBA and has suggested you might consider

bundling as a way to boost profits.

a) Here are the customer preferences and your cost are $100 for the first booking

and $50 for each additional booking. Compare the profit with and without

bundling. Which strategy should be used? Show your calculations.

b) The sales manager also suggests that there is a possibility that some customers

will never bundle. She says in some cases it might be possible to bundle and also

offer each customer only the trip they prefer, a practice known as mixed bundling.

You know that about 21% of your customers decline cruises because of sea sickness.

At least 12% decline the casino trip saying they don’t believe in gambling. As a

rough estimate you initially estimate that approximately 33% of your customers will

never bundle. Will mixed bundling increase profits? You must show that

calculations that support your conclusion.

Price Packages TR MR TC MC MR-MC Profit

100 50 450

90 70 650

80 90 850

70 110 1050

60 130 1250

50 150 1450

40 170 1650

30 190 1850

20 210 2050

10 230 2250

We Book Your Honeymoon Tour

Cruise Casino

Customer 1 $7,000 $3,000

Customer 2 $2,000 $6,000