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Suppose that technophiles are willing to pay $400 now for the latest iPhone, but only $300 if they have to wait a year. Normal people are willing to pay $250 and their desire to purchase doesn't vary with time. Ignore the time value of money and compute the optimal pricing scheme of the iPhone. Assume that there are equal numbers of each customer type and the MC of the iPhone is $100.

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Suppose that technophiles are willing to pay $400 now for the latest iPhone, but only $300 if they have to wait a year. Normal people are willing to pay $250 and their desire to purchase doesn't vary with time. Ignore the time value of money and compute the optimal pricing scheme of the iPhone. Assume that there are equal numbers of each customer type and the MC of the iPhone is $100.

1.) Suppose that Joe enjoys and repeatedly does stupid things like getting heavily into debt and insulting police officers. Do these actions constitute systematic errors? If he gets what he wants each time, are his stupid actions even considered to be errors by economists? Explain.

2.) Why do behavioral economists consider it helpful to base a theory of economic behavior on the actual mental processes that people use to make decisions? Why do neoclassical economists not care about whether a theory incorporates those actual mental processes?

10.) What does behavioral economics have to say about each of the following statements?

a.) "Nobody is truly charitable--they just give money to show off."

b.) "America has a ruthless capitalist system. Considerations of fairness are totally ignored."

c.) "Selfish people always get ahead. It's like nobody even notices!"

__________________________________________________________________

1.) One type of systematic error arises because people tend to think of benefits in percentage terms rather than in absolute dollar amounts. As an example, Samir is willing to drive 20 minutes out of his way to save $4 on a grocery item that costs $10 at a local market. But he is unwilling to drive 20 minutes out of his way to save $10 on a laptop that costs $400 at a local store. In percentage terms, how big is the saving on the grocery item? On the laptop? In absolute terms, how big is the savings on the grocery item? On the laptop? If Samir is willing to sacrifice 20 minutes of his time to save $4 in one case, shouldn't he also be willing to sacrifice 20 minutes of his time to save $10?

4.) Angela owes $500 on a credit card and $2,000 on a student loan. The credit card has a 15 percent annual interest rate and the student loan has a 7 percent annual interest rate. Her sense of loss aversion makes her more anxious about the larger loan. As a result, she plans to pay it off first--depsite the fact that professional financial advisors always tell people to pay off their highest-interest-rate loans first. Suppose Angela has only $500 at the present time to help pay down her loans and that this $500 will be the only money she will have for making debt payments for at least the next year. If she uses the $500 to pay off the credit card, how much interest will accrue on the other loan over the coming year? On the other hand, if she uses the $500 to pay off part of the student loan, how much in combined interest will she owe over the next year on the remaining balances on the two loans? By how many dollars will she be better off if she uses the $500 to completely pay off the credit card rather than partly paying down the student loan? (HInt: If you owe X dollars at an annual interest rate of Y percent, your annual interest payment will be X * Y, where the interest rate Y is expressed as a decimal.)

ConAgra's ill-fated price hike for Banquet dinners prompts creative cost-cutting and marketing moves

Gary M. Rodkin found out the hard way the perils of pushing up the price of a Banquet frozen dinner. When the chief executive of ConAgra Foods tried to recoup high commodity costs by hiking the list price of Banquet products in September, many retailers began charging up to $1.25 a meal. The response from shoppers used to pay $1? The cold shoulder.

A chastened Rodkin soon discovered why Banquet had become an $800 million brand for the $12 billion-a-year Omaha food company. "The key component for Banquet dinners--the key attribute--is you've got to be at $1," he says. "Everything else pales in comparison to that."

The resulting sales drop forced ConAgra to peddle excess dinners to discounters and contributed to a 40% drop in its stock price in 2008. It also prompted Rodkin, 56, to move ConAgra further into austerity mode. He expects to cut $250 million in costs this fiscal year, which ends in May and trim close to the same amount next year. Some of the savings will come from moves such as centralizing purchasing and shipping. But Rodkin is also pushing for creative ways to hold down costs in ConAgra's 37 brands, which include Chef Boyardee, Marie Callender's, Hunt's, and Healthy Choice.

Rodkin's priority: bringing the cost of Banquet dinners back to a buck. ConAgra first tossed out pricey items such as barbecued chicken and country-fried pork in favor of grilled meat patties and rice and beans. It also shrank portion sizes while swapping in cheaper ingredients, such as mashed potatoes for brownies. What Rodkin didn't sacrifice was variety, with close to 100 Banquet-branded products.

ConAgra has made other moves on the cheap. It's reducing the number of can sizes in lines such as Hunt's and Van Camp's to save on manufacturing costs. The company is cutting investment in mature brands such as Egg Beaters and Hebrew National to free up money for growing lines such as Orville Redenbacher's popcorn. It has innovated at low cost by adapting the packaging of the hit line Healthy Choice Cafe Steamers for Marie Callender's frozen meals. And it has increased the nutritional value of food products rarely hyped for health benefits, such as Chef Boyardee, by switching to "white whole wheat pasta"--at no extra expense. Andre Hawaux, who heads the consumer foods unit, says customers want better food, but they're not willing to pay more.

For Rodkin, who came from PepsiCo in 2005, managing ConAgra has been a rocky affair. Less than a year after he arrived, his Peter Pan line sickened hundreds of people with salmonella, leading to a massive recall. (Peter Pan is not implicated in the latest episode of tainted peanut butter.) Critics say he hasn't moved fast enough to ditch marginal brands such as Crunch 'n Munch, Andy Capp's fries, and Patio Mexican foods. Gimme Credit analyst B. Craig Hutson notes the stock has shrunk by a third under Rodkin, calling his performance "disappointing despite many promises of a turnaround."

At least customers are now responding to Rodkin's efforts to keep down the cost of Banquet dinners. Citigroup analyst David Driscoll says ConAgra is well-positioned now. "Where else can you find dinner for 99 cents?"

PHOTO (COLOR): Rodkin shrank portions and cut ingredient costs; now buyers are coming back

~~~~~~~~

By Joseph Weber

2. Read the article "Over a Buck for Dinner? Outrageous" (Business Week March 9, 2009, p. 57) and apply S&D analysis to answer the following questions.

a. The "sales drop" described in the third paragraph refers to a decrease in ____________________ (D/Qd). The "excess dinners" that ConAgra had to peddle to discounters (3rd paragraph) refers to a ______________________ (shortage / surplus).

b. Rodkin's "priority" described in the 4th paragraph is intended to shift which side of his market: S? or D? And which way: right? or left?

c. Boxed meals and canned soup are they normal goods, or inferior? Explain. When the economy expands, will it be a boost to the makers of these items or a drag?

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