Final Exam Practice Problems Managerial Economics

Final Exam Practice Problems Managerial Economics

1. (20 points) You are planning to introduce a new wine into your local market of Springdale. In order to

prepare for the product launch, you sent out an internet survey to a random sample of the 46,650

households in the city. You received a very reasonable response rate and you think the results should

be representative of the entire market. You are particularly interested in the following results:

 3.2% of the households indicate that they would be willing to buy your wine every month, 4.0%

of the households say they would be willing to buy every other month and 1.8% would be willing

to buy the wine twice per year (assume the purchases are evenly distributed throughout the

year).

 The survey asked households the maximum amount they would be willing to pay for a bottle of

the wine and you were able to construct the following table:

Local norms dictate that you have to charge a price that is a whole number, which limits you to only the

possible prices above (that is, use the table rather than estimate a demand function). Also you are risk

neutral with regards to the results of this study.

a) (4 points) How many bottles of wine do you expect to sell in an average month if wine is $1 per

bottle?

If we sell at minimum price then our total number of potential customers is just based on the first bullet

point above, we just need to adjust for the fact that not all the buyers will buy every month. We can see

below that we multiple 4% times one half, since 4% will buy the wine every other month. A similar

adjustment is made for the 1.8% that buy twice a year.

PotentialBuyers  ((0.0321)(0.040.5)(0.018(2 /12))46,650  2,566

Price per

bottle

% of potential

buyers willing

to pay this

price

$ 1.00 3%

$ 2.00 3%

$ 3.00 5%

$ 4.00 8%

$ 5.00 8%

$