# Managerial Economics 510.. Problem Set 1

Jul 14th, 2016
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12. Modifying a product to increase its “value added” benefits customers and can also enhance supplier profits. For example, suppose an improved version of a product increases customer value added by \$25 per unit. (In effect, the demand curve undergoes a parallel upward shift of \$25.) 6. A minor league baseball team is trying to predict ticket sales for the upcoming season and is considering changing ticket prices. a. The elasticity of ticket sales with respect to the size of the local population is estimated to be about 0.7. Briefly explain what this number means. If the local population increases from 60,000 to 61,500, what is the predicted change in ticket sales? b. Currently, a typical fan pays an average ticket price of \$10. The price elasticity of demand for tickets is 0 .6. Management is thinking of raising the average ticket price to \$11. Compute the predicted percentage change in tickets sold. Would you expect ticket revenue to rise or fall?

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12.a. If the redesign is expected to increase the items marginal cost by \$30,should the company undertake it?25-30= -5By increasing the marginal cost by \$30 there will be a negative loss of \$5 per unit because thecustomer value added is \$25 per unit. So the company should not undertake the redesign.b. Suppose instead that the redesign increases marginal cost by \$15.Should the firm undertake it, and (if so) how should it vary itsoriginal output and price?25-15= 10By increasing the marginal cost by \$15 there is a positive of \$10 per unit. So the company shouldundertake this redesign. The output will increase and the price will increase by \$15.6. A minor-league baseball team is trying to predict ticket sales for the upcoming seasonand is considering changing ticket prices.a. The elasticity of ticket sales with respect to the size of the local population is estimated to

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