Questions set in Economics

Question 1

Rebecca substitutes her income as a teaching assistant by editing term papers for undergraduates.

There are 8 students per week for who she might edit, each with awillingness to pay as given in the following table:

 

 

Student WTP
A $40
B $38
C $36
D $34
E $32
F $30
G $28
H $26

Rebecca is a profit maximizer, and her opportunity cost of her time to edit each paper is $27.

1. If Rebecca had to charge the same price to each student, how many papers should she edit? What is her economic profit?

2. Through experience and repeat business, Rebecca knows the willingness to pay of each student. How many papers will she edit if she could charge a different price to each student?  What will her economic profit be?  Is economic profit higher or lower than the first scenario?  Why?

3. Suppose Rebecca cannot charge a different price to each student but instead offers a rebate coupon. She knows from experience and repeat business that students whose willingness to pay at least $36 or more never mail in rebate coupons, while those whose willingness to pay is below $36 always do so.   Assuming the same opportunity cost of $27 , what should Rebecca’s list (high) price be and what amount should she offer as a rebate?  What will her economic profit be?    Is economic profit higher or lower than the first scenario?  Why?

 

Question 2

Discuss the impact of the following factors on the optimal method of procuring an input

 

a.  bureaucracy costs

b. specialized investments

c. events that cannot be specified or forecasted

d. benefits from specialization

Question 3

Pharmaceutical companies, such as Eli Lilly, provided low income, elderly people with a card guaranteeing them discounts for many prescription medicines.  Why would pharmaceutical companies do that?  How do such firms benefit from doing so?

Question 4

This is a  simultaneous move game:  Two discount stores (Walmart and Target) are interested in expanding their market share through advertising. The table below depicts the profits  of both stores with and without advertising:

 

    Target
    Advertise Don’t Advertise
Walmart Advertise $190, $160 $610, $110
Don’t Advertise $130, $560 $330, $225

 

a.       What is the optimal strategy for each player?  Why?

b.       What is the equilibrium payoff for the stores? Why?

c.       Should these firm cooperate (if it was legal to do so)? Why?

Question5

Pep Boys Auto Repair owns 1,000  automobile repair centers across the country.

The company recently changed its compensation from paying auto mechanics an hourly wage to a commission-based  (% of sales) system.

What are the advantages and disadvantages of paying auto mechanics by commission?