Applied

Microeconomics

Lecture 24

BE 300

Plan for Today

Final exam info

Bundles of Joy

Coming Up

This is the last lecture.

Next Tuesday will be a review session for the final.

No attendance will be taken.

Office Hours

Next week I will hold my office hours on Tuesday at 10am rather than Thursday at 10am.

 

The week of the exam I will hold extra office hours on Monday  (4/27 at 10am) and Tuesday (4/28 at 10am). I am also available by appointment.

 

If you are having trouble with the material--come see me! It's what I'm here for.

Final Exam Logistics

The exam is Wednesday, April 29 from 10:30a to 12:30p.

• If you are in SECTION 1 with a last name beginning with a letter between A and L you will take the exam in R1210.
• If you are in SECTION 1 with a last name M through Z you will take the exam in R1220.
• If you are in SECTION 4 with a last name beginning with a letter between A and L you will take the exam in R1230.
• If you are in SECTION 4 with a last name beginning with a letter between M and Z you will take the exam in R1240 .

 

If you are in the extended time group, your exam will be from 10am to 1:00pm (let me know ASAP via email if you have a conflict). Room TBD.

If you have a conflict with another exam, we are offering an alternate time, 8:00-10:00am Wednesday in R2220.

Final Exam

You have support--take advantage of it!

Final Exam

There are additional review sessions you have the option to attend. The emphasis of these sessions will be working through example problems:

 

Tuesday, April 21, 5:30 – 7:00pm (W2760)
Bundling & Two-Part Tariffs

 

Wednesday, April 22, 2:00p to 4:00p (R2220)
“Fight” strategies & other game theory topics

 

Tuesday, April 28, 2:00 – 4:00pm (R0220)

General Exam Review

Final Exam

•Format: Multiple choice and short answer

•Cheat Sheet permitted (8.5x11/2-sided); otherwise, closed book, closed notes.

•Bring your own calculator

•Bring a  #2 pencil for multiple choice answers (which you will enter on a Scantron sheet)

•No partial credit given on multiple choice

•Credit on short answer only if work is shown

Coverage: emphasis on topics from after the midterm

BUT NOTE: RISK PREFERENCES (risk averse, risk loving, risk neutral) MAY BE ON THE FINAL (although we covered it prior to the midterm, we did not ask any questions about it).

AUCTIONS WILL NOT BE ON THE FINAL.

Final Exam

•Manage your time carefully.  Use point allocations as a guide to how much time to spend on each question.

•Read questions very thoroughly.  Use the information in the question to define the problem.

•Show all your work for short answer questions. 

    If  you can’t get the numerical answer

–give a qualitative (intuitive or graphical) answer

–assume quantitative values that allow you to continue with calculations in later parts of the exam.

Final Exam: Some Strategies

•Review slides

~Focus on problems done during class

•Review cases

~Read through answer guides (posted on Ctools)

~Next day, try to re-do the case (w/o looking at the answers)

~Repeat until you can do all the case questions w/o looking to the answers for hints

 

Final Exam

Practice Problems (Ctools files)

~By the end of this weekend, work through all problems in modules

–Review 2 (demand), 3 (profit max)

–Review 4 (Market Analysis): ALL, but focus on #1 – #6, #8 & #9

–6 & 7 (risk & uncertainty; information)

–8A (single-price strategies): skip #8

–8B (multi-part pricing strategies)

Final Exam

Practice Exam problems NOT applicable for 2015 final exam:

~2010 Final Exam: MC #2, 3, 5, 7 & 8

~2013 Final Exam: III.5 (last short answer part)

~2014 Final Exam: MC #9

Bundling

Last week we talked about bundling.

What is bundling? What are some reasons firms bundle products?

Bundling

Some reasons for bundling:

• Form of price discrimination (if consumers have negatively correlated demands for the product)
• Avoid costly searching and sorting.
• Make things more convenient for the customer.

 

Bundles of Joy

A common area where products are bundled (although this is changing) is cable television channels: can't buy one channel without buying other channels that you are less interested in.

 

That is what this case is about. We consider the market for two channels: Food Network (FN) and History Channel (HC)

Bundles of Joy

Demand for each channel is   (Q in millions):

Q = 1 − P.

 

How should the firm price each channel if they are being sold separately?

Bundles of Joy

Two separate demands--two separate profit maximizing decisions.

P* = $.50;  Q*=.5 mil. for each channel

 TR = ($.50*.5 mil.) + ($.50*.5 mil.) =  $.5 million

Bundles of Joy

Positively correlated demands: consumers who have a high value for FN tend to have a high value for HC.

What is A's value for the bundle of HC + FN?

What about B, C, D, E?

Bundles of Joy

In this case, willingness to pay for the bundle is exactly twice what willingness to pay for each channel is.

WTP for each channel: P=1-Q

WTP for the bundle: P=2*(1-Q)=2-2Q.

 

So the firm's MR curve for the bundle is...?

Bundles of Joy

P = 2 – 2Q  =>  P* = $1 ;  Q* = .5 mil.

TR = $1*.5 mil. =  $.5 million

Have we improved our revenue?

Bundles of Joy

Bundling, as a form of price discrimination, does not increase revenue if demands are positively correlated (i.e., those with high demand for one product also tend to have high demand for the other product)

Bundles of Joy

What about negatively correlated demand curves?

What is A's WTP for a bundle of FN+HC?

What about B, C, D, E?

Bundles of Joy

Very strange demand! What should the firm charge?

Bundles of Joy

P* = $1 ;  Q* = 1 million

 TR = $1*1 mil. =  $1 million

Bundles of Joy

What about economic efficiency? I.e., total surplus (PS (in this case, profit) + CS)?

Bundles of Joy

What about total surplus (PS (in this case, profit) + CS)?

Unbundled: PS=0.5 million

CS=0.25 million

Total surplus=0.75 million

Bundles of Joy

Bundled: PS=$1 million

CS=?

Bundles of Joy

As we talked about last class, cable television may be beginning to "unbundle" after years of being the classic bundled good. Let's see how that would affect things in this example:

 

Suppose that the cost of producing a month's worth of programming is $220,000 for the Food Network and $310,000 for The History Channel. What would be the most likely outcome if demand were perfectly positively correlated?

Bundles of Joy

Positively correlated demands--we know operating profit (not including programming costs) is $500k.

Offer both programs--total profit, taking into account programming costs, is $500k - $220k - $310k = -$30k.

 

What if they just offered food network?

What if they just offered history channel?

Bundles of Joy

Food network--would earn $250-$220=$50k.

History channel--would earn $250-$310=-$60k.

 

Makes sense to only offer the Food Network.

Bundles of Joy

What about with bundling (when demands are negatively correlated)?

 

Recall: TR was $1 million

Costs were $220,000 for the Food Network and $310,000 for The History Channel

Bundles of Joy

With bundling:

$1,000,000 − $220,000 − $310,000 = $470,000

 

Makes sense to offer both!