ProblemSetIII

BSP1005ManagerialEconomics

SemesterII,20132014

BSP1005
Managerial Economics

PROBLEM SET III

Deadline: 7 am, Monday, 24 March

Late Submission is not accepted.

INSTRUCTRIONS

1. Please follow the usual routines:

Submit a soft copy in Word or PDF format. No phone camera shot, please
through the Students Submissions folder in IVLE. When uploading, please
specify your team name and tutorial section number.
One common work is to be submitted per each team.

2. When submitting, please write on the cover page the followings:

Tutorial Section Number

Team Name (Your Host Economist)
Names of Team Members

ProblemSetIII
BSP1005ManagerialEconomics

SemesterII,20132014

QUESTION I (60 marks)

(This is a story made up based on the 2002-2003 controversy regarding the men-only policy of Augusta
National Golf Club, the home to the Masters Golf Tournament. Hootie Johnson was the chairman of the
Augusta defending Augustas policy and Martha Burke was the president of National Council of Womens
Organizations leading the protest against Augustas policy. Main characters stances have been reversed here,
just for fun.)

Martha National County Club is a golf club in an isolated wealthy community and accepts only
females as members. There are 1,000 identical female members of the club and a typical member has
a yearly demand for rounds of golf expressed as:
P = 150 Q
,where Q is the number of rounds of golf per year at a green fee of P per round.
This year, Martha has priced its annual membership fee at $7,000 and its green fee at $30 per round of
golf. (Green fee includes caddie/buggy fee as well.) It costs Martha a constant $25 to provide a round
of golf for each member. Marthas annual fixed cost of running the club is $1,000,000.
(1) (20 marks) Martha is now contemplating lowering its annual membership fee to $6,500 and
raising its green fee to $40 for the next year. The clubs Board feels that the 1,000 members
would still be interested in maintaining their memberships at Martha next year if the price is
right and that their demand will be the same as this years.
When it prices the clubs yearly membership and green fees for next year, should Martha
continue with its current pricing scheme or switch to the new one?
(2) (20 nmarks) The community has another 1,000 identical male golfers whose individual yearly
demand for golf rounds is known to be
P = 100 Q
, but the female-only policy at Martha is forcing the male golfers to drive 100 km to a neighbor
town to play golf.
There have been rallies for years led by Mr. Hootie, the chairman of The Community Council
of Mens Organizations, during the week of the major club championship tournament The
Mistresses hosted by Martha National, and the club was urged to change its malediscriminating policy. A board member Ms. Burks at Marta National this year proposed an idea:
Lets erase the female-only clause from our Club Charter. Still, we can keep them
away if we set the membership and green fees smart so that they dont have an
incentive to join.
What yearly membership and per-round green fee would Martha National Golf Club have to
charge to successfully exclude male golfers while trying to make as much profits as possible
from the female golfers? Assume that a gender-specific pricing scheme will bring about more
serious petitions and therefore every member should be charged the same set of membership
and per-round green fees.
(3) (20 marks) Would it be more profitable for Martha National to cater to both female and male
golfers at its best outcome? Quantify your answers. Assume that every member should be
charged the same set of membership and per-round green fees.

ProblemSetIII
BSP1005ManagerialEconomics

SemesterII,20132014

Question III (40 marks)

Tight-Sleep, Inc. is a large pharmaceutical firm based in Singapore. It sells its brand of sleeping pills
named Managerial Economics both in Asia and in Europe. Now-Sleep hired the NUS economist Jo to
estimate the daily demand in Asia and Europe, which turned out to be:
QA = 60 - PA and QE = 44 - PE
where QA(QE) is the quantity of the sleeping pills demanded in Asia(Europe) and PA (PE) is the unit
price of the sleeping pills in Asia(Europe). Now-Sleeps average total cost (ATC) of producing
sleeping pills is:
ATC = 4 + 0.1QT, where QT = QA + QE
is the total number of sleeping pills produced by Now-Sleep. Transportation costs are a negligible
portion of the total cost and can be neglected. Your client (Now-Sleep) wants answers (and quickly)
for the following answers.
(1) (20 marks) If Now-Sleep can successfully prevent arbitrage resale between the two markets,
what quantities under what prices should the firm sell in each region? And what would be the
maximum profit level that could be achieved under such a policy?
(Assume that each region prohibits the firm from charging different prices for different
consumers or different units in each region. That is, only the third-degree price
discrimination is considered.)

(2) (20 marks) Suppose that Singapore signed an international trade agreement with the Asian
and European countries, under which an MFN clause with respect to pricing applies: the
identical products should be charged the same price everywhere. How much better would the
firm do by following the above strategy in (1) as compared to the best they could do under
this new MFN clause?

END Of PROBLEM SET III