What is the difference between Demand and Quantity Demanded?
Consumer demand—level and price sensitivity—depends on personal income and other characteristics that influence desire for a product? For example, big families with one earner would probably demand a large quantity of food but be very sensitive to food prices. Dual-income households without children would eat less and be less sensitive to price. Draw demand curves that reflect the differences of these two groups of consumers and explain the relative positions and slopes of the demand curves. (The demand curves should be qualitatively correct, but without numbers).
Plot demand curves for Weekday and Weekend (two P,Q points for each curve), using P1=$34; P2=$60. You can do this with any Scenario (A, B.1, B.2, C). Clearly indicate the Scenario you are using. Note: Make sure that both points are from the same demand curve. Based on your plotted demand curves, what can you say about Weekday vs. Weekend demand?
Universal’s variable cost to rent a car is $15. Assume the fleet size is fixed at 21,666. How many cars would you be willing to rent at a price of $10? $20? $50? Explain your thinking behind these answers. Note: Answer does not depend on Scenario.
Use the above answers to describe Universal’s supply curve—that is, what is the quantity supplied at various prices? Graph the supply curve, showing numbers for P and Q. Show enough points to completely define the supply curve. Note: Answer does not depend on Scenario.
Universal’s fixed costs are $4.78M per month for “other fixed costs” (e.g., building rent, manager salaries, etc.) regardless of fleet size. Vehicle inventory management costs are fixed at $7.43M per month for a fleet of 21,666 cars. With the 21,666 fleet, total fixed costs for the fleet per month are $4.78M + $7.43M = $12.21M? What are total fixed costs per car per month? Per car per day? Show your calculations. Note: Answer does not depend on Scenario.
With a fleet of 21,666 cars, what is the lowest price Universal could charge that would cover all its costs? Explain. Note: Answer does not depend on Scenario.
Enter the price from the previous question (i.e., that just covers all costs) as weekday and weekend prices for Nov in Scenario C. Check the Net Income tab. Were all costs covered? If not, what happened?
Explain how each of the following would affect the demand curve for Universal’s rental cars and why:
Consumer incomes increase
Competitor’s price decreases
Switch from High-season to Low-season for travel to Orlando
Universal’s price increases.
If demand for rental cars in Orlando were constant throughout the year, how could the quantities listed in the column “Market Demand” (in the Market Demand tab of the simulation) increase every month? Note: Answer does not depend on Scenario.
How can you remove movements along the demand curve so that you can see month-to-month shifts in the demand curve, November through September (the period for which you want to maximize profits)? Explain the process and show the results in the form of a spreadsheet. Using Scenario C, replicate the Seasonality spreadsheet template using prices of $36.50 (weekday) and $31.10 (weekend) for every month (Nov-Sep). If you find seasonal variation in demand, use your knowledge of Orlando as a vacation and business conference destination to explain the variation. Make specific reference to the numbers in your version of the Seasonality spreadsheet and include it with your exam.
Price elasticity of demand summarizes price sensitivity with one number. Define it and show the formula for computing it. Explain its usefulness in business?
What data do you need to accurately estimate a company’s price elasticity of demand? What are the challenges of collecting such data for a business?
Within a given Scenario, the pricing simulation gives the same results every run. That is, if you input the same set of monthly prices on runs 1,2,3, etc., all the metrics (orders, capacity utilization, revenues, profits, etc.) will be identical from run to run. How can you use this knowledge to estimate Universal’s price elasticity of demand regardless of monthly changes in demand and in the competitor’s price? Demonstrate your method by calculating weekday price elasticity in Nov at a price of $50 (mid-point), using any Scenario (clearly indicate which one you use). Show your work.
Explain why companies usually prefer to sell inelastic goods. Give an example.
What can a company do to reduce the price elasticity of the goods it sells?
In the pricing simulation, why do elasticities differ between weekday and weekend when measured at the same price? Note: Answer does not depend on Scenario.
Why do elasticities increase with price? Note: Answer does not depend on Scenario.
Explain conceptually why revenues increase for price increases in the inelastic range and decrease for price increases in the elastic range. Note: Answer does not depend on Scenario.
How does knowing the relationship of revenue and elasticity affect your pricing decisions? Note: Answer does not depend on Scenario.
Explain how finding the price that maximizes contribution margin is the same as finding the profit-maximizing price. Note: Answer does not depend on Scenario.
If you want to test a range of prices to find the one that maximizes contribution margin, what is the lowest price you need to test? Why? Note: Answer does not depend on Scenario.
Why would you consider testing prices in the elastic range when you know that revenues will decrease if you increase prices in that range? Note: Answer does not depend on Scenario.
Using Scenario C data for November, explain your process for finding the price that maximizes contribution margin. How do you know that you have found the price that maximizes contribution margin? (i.e., that no lower or higher price would produce a greater contribution margin). Show your data in a spreadsheet (use the spreadsheet template Finding Optimal Price Using Contribution Margin located in Course Resources) and explain each column of the spreadsheet.
Define indirect price discrimination. Explain how it differs from direct price discrimination. Explain the key assumptions for indirect price discrimination to work. Explain how charging a different price on weekdays vs weekends is an example of indirect price discrimination. Note: Answer does not depend on Scenario.
Using Market Size data from the Market Research tab in the simulation, demonstrate that the requirements for indirect discrimination to work are met. Use any Scenario; clearly indicate which one and show month(s) and prices that produced the results.
Compute the profit gain from Universal using indirect price discrimination. Show and explain your work. Use any Scenario; clearly indicate which one and show month(s) and prices that produced the results.
Despite the term “discrimination”, which generally carries a negative connotation, all customers benefit from indirect price discrimination. Explain the benefits to both leisure and business renters. Note: Answer does not depend on Scenario.
Under what circumstances does the profit maximizing price leave unrented capacity? Why? Note: concept doesn’t depend on Scenario, but numbers do. Use any Scenario that produces this phenomenon; indicate Scenario and inputs that produced the result.
Under what circumstances would Universal have unfilled orders? Prove that unfilled orders always mean that you have not maximized profits. Note: concept doesn’t depend on Scenario, but numbers do. Use any Scenario that produces this phenomenon; indicate Scenario and inputs that produced the result.
In Scenario C, when you set your prices to maximize profits in Dec, how many cars are unrented for the month? What is the vehicle inventory management cost for those unrented cars in Dec? How does that cost compare with your profits for December?
Using Scenario C, if you were being measured solely by January’s results, what fleet size would you choose for January? Why? What price would you charge?
Using Scenario C, after you adjust fleet size in January, compare the margins (gross margin, operating margin, and pre-tax profits) for December and January—Total and Per Rented Car. What do you conclude? How does this information affect your strategy?
In Nov and Dec, Universal had many unrented cars when it charged the optimal price. That optimal price is based on demand and internal costs. Why might you want to reduce fleet size below the number of cars you could rent at those optimal prices? (Hint: think about why you raised price even when revenues were decreasing when you calculated Nov and Dec optimal prices. How is reducing fleet below what you could rent at the optimal price similar?)
Explain how to determine optimal fleet sizes and prices using the approach demonstrated in the “optimal fleet size spreadsheet” and explained in the Panopto recording on the Fleet Size Decision. Conduct a similar analysis with the major project Scenario C. Explain your strategy and calculations. Report and discuss the results.
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