Economics

Q1: SUPPLY AND DEMAND Columnist Jack Mabley of the Chicago Tribune reports that “General Motors just increased prices another 2.5%” even after a “bad year” and concludes that “if the law of supply and demand were working, GM would reduce prices, not raise them.” Do you agree or disagree with Mabley’s argument? Use Supply and Demand analysis to explain. Q2: CONSUMER CHOICE MODEL (only answer one: Q2 or Q3) Many hotels rely on promotions in order to increase sales. Say you are a hotel manager choosing between two different promotions: a Buy Three, Get Fourth Free promotion (BOGOF), and Half-Price promotion. Before any promotion was announced, Angela and Betty (two potential buyers), were separately planning to stay at the hotel for two nights each this month. Each has the same income and allocates the same budget to her vacation. 1. In two diagrams (one for each potential buyer), shows that Angela takes advantage of the BOGOF promotion and Betty does not because their tastes differ. 2. As an alternative to the BOGOF promotion (“the fourth night free if you pay for three nights”), the resort could offer a half-price promotion in which, after staying two nights at full price, the next two nights are half the usual price. Assume the resort earns the same revenue from either promotion if someone stays four nights. Draw the new situation in each of the diagrams you used in part (a). 3. Which promotion would be more effective for which buyer? Q3: CONSUMER CHOICE MODEL (only answer one: Q2 or Q3) The Syrcause Sckychiefs are a minor league baseball team. Skychiefs charge $10 for a reserved seat ticket to any one of their 71 home games they play each year. In addition, only before the season begins, the team offers to sell one and only one ticket book to each fan. The ticket book contain 10 reserve seat tickets to any game for a total payment of$50. Using consumer theory, show why the Skychiefs sell the ticket book. 1. If Skychiefs tickets are an inferior good, could a fan end attending fewer games a year because of the ticket book offer? 2. If Skychiefs tickets are a normal good, could a fan end up attending fewer games a year because of the ticket book offer? 3. What does this suggests about the team’s belief concerning the income elasticity of demand for tickets? Q4: DEMAND CURVE Olive Garden anticipates a purchase frequency of 60 servings of lasagna per night at a price of $11.99 and plans their operations accordingly. When fewer than 60 customers arrive on a given evening, the Olive Garden restaurateur does something very different than a Ford auto dealer might in similar circumstances. The restaurant slashes orders; fewer trays of pre-prepared lasagna are put into the oven and baked. Instead of slashing prices in the face of deficient demand, restaurants order less production and increase the size of their servings. Why is that? Answer using the concept of price elasticity of demand.