ECN 303 Practice Problems for Chapter 3

3, 6a, 6b, 9a and 9b in the textbook.

For problem 3, please also determine the weekly sales of tacos per store if McPablo’s raises price
by 4% while cutting its advertising expenditure by 10%.

Prilosec Pricing Problem

In 1996 the drug Prilosec became the best-selling anti-ulcer drug in the world. (The drug was the
most effective available and its sales outdistanced those of its nearest competitor.) Although
Prilosec’s marginal cost (production and packaging) was only about $.60 per daily dose, the drug’s
manufacturer initially set the price at $3.00 per dost – a 400 percent markup relative to MC!

Research on demand for leading prescription drugs gives estimates of price elasticities in the range
– 1.4 to – 1.2. Does setting a price of $3.00 (or more) make economic sense? Explain.

Airline Pricing Problem

Midsouth Airline has leased a 300-seat carrier to fly its daily Dallas-Denver route. It faces the
following demand equations for business and tourist travel.

QBd = 330 - PB, QTd = 250 - PT

The daily fixed costs of leasing a 300-seat carrier are $32,000. Midsouth’s service cost is $20 per
passenger.

1. How many business and tourist passengers should Midsouth seek to carry on each flight to
maximize its profits?
2. What prices should Midsouth charge for each type of travelers? What are the maximum
profits?
3. If Midsouth could not price discriminate, determine its profit maximizing price, number of
passengers, and maximum profits.
4. How do your answers to problems 1 and 2 change if Midsouth is restricted to leasing 180-
seat aircraft only? The daily fixed costs of leasing a 180-seat aircraft are $20,000.

Gasoline Pricing Problem

A BP franchisee owns two gas stations in the metro area: one in Detroit, and the other in West
Bloomfield. He faces the following demand conditions: He has estimated that the demand for
gasoline at his Detroit location is QDet = 60 - 20PDet, and QWB = 80 - 20PWB, where Q is in thousands
of gallons sold per week, and P is in dollars/gallon. It costs him $1.50 per gallon to distribute the
gas he obtains from BP. Assuming no fixed costs.

1. If the BP franchisee charges the same price for gas at both locations, how much profit
would he make?
2. If the BP franchisee charges different prices for gas at the two locations, how much profit
would he make?
3. If he can only obtain 20 thousand gallons of gas from BP per week, how should he allocate
the gasoline between the two gas stations?