Page 553 - Microeconomics, Fourth Edition

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PROBLEMS 527
a) If x 1 and you do not bundle the two products, what to be approximately constant over a wide range of prices
are your profit-maximizing prices P B and P F ? Calculate and advertising expenses.
total surplus under this outcome. a) By how much should the company mark up price over
b) Now assume only that x 0. Instead, suppose that marginal cost for its footwear?
you hired an economist who tells you that the b) What should the company’s advertising-to-sales
profit-maximizing bundle price (for a burger and fries) is ratio be?
$8, while if you sold the items individually (and did not
offer a bundle) your profit-maximizing price for fries 12.30. The motor home industry consists of a small
would be greater than $3. Using this information, what is number of large firms. In 2003, producers of motor
the range of possible values for x? homes had an average advertising sales ratio of 1.8 per-
cent. Assuming that the price elasticity of demand facing
12.29. Suppose your company produces athletic a typical motor home producer is 4, what is the adver-
footwear. Marketing studies indicate that your own price tising elasticity of demand facing a typical producer,
elasticity of demand is 3 and that your advertising elas- under the assumption that each producer has chosen its
ticity of demand is 0.5. You may assume these elasticities price and advertising level to maximize profits?