Econ 352 Test 2 Place Name Only Here ________________________
Answer all four problems on the attached pages. Limit your answers to one page maximum. Explain
your answers.
1. Suppose your elasticity of demand for your parking lot spaces is -2, and price is $8/day. If your
MC is zero, and your capacity is 80% full at 9 A.M. over the last month, are you optimizing?
2. In 1931, Pepsi was almost broke. The Great Depression hit it hard, and Coke had most of the
duopoly market for soft drinks in the United States. Pepsi tried many things: marketing
campaigns, label changes, and more. Then it came up with the idea of selling 12-ounce bottles
for 5 cents, which had been the 6-ounce price. Coke could have followed the price per unit
down, but it didn’t. Total soft drink demand increased, and Pepsi took a larger share of the
demand. Why is the equilibrium of this game different from that of a prisoners’ dilemma? (Hint:
Change the payoffs of the prisoners’ dilemma to reflect the implied equilibrium.)
3. Suppose your marketing department does a survey of potential users and finds that these users
place the following values on the two versions of your software:
Software Version Home Users Commercial Users
Disabled version $150 $200
Full-featured version $175 $500
If the number of home and commercial users are equal, and you cannot distinguish between
commercial and home users, what is the most profitable pricing strategy? Assume the MC of production
is zero. Explain your answer.
a. Sell only to commercial users.
b. Sell only to home users.
c. Sell to both groups using a single price.
d. Sell to both groups at two different prices.
4. Taking a non-strategic view of bargaining, why does receiving a job offer from another
employer help you attain a raise from your current employer even if you would prefer to retain
your current job?
