ECOM152 Practical Asset Pricing 2021
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ECOM152 Practical Asset Pricing
2021
Question 1
Amazon wants to increase its total revenue. One strategy is to offer a 10\% discount on every book it sells. Amazon knows that its customers can be divided into two distinct groups according to their likely responses to the discount. The accompanying table shows how the two groups respond to the discount.
|
Group A (million) |
Group B (million) |
Volume of sales before the 10% discount |
$1.55 |
$1.50 |
Volume of sales after the 10% discount |
$1.65 |
$1.70 |
Table 1
a) Using the midpoint method, calculate the price elasticities of demand for group A and group B.
[15 marks]
b) Explain how the discount will affect total revenue from each group.
[5 marks]
c) Suppose Amazon knows which group each customer belongs to when he logs on and can choose whether or not to offer the 10\% discount. If Amazon wants to increase its total revenue, should discounts be offered to group A or to group B, to neither group, or to both groups?
[5 marks]
d) Explain how Price Elasticities can help improving pricing? Define the concept and describe the different types of elasticities.
[15 marks]
Question 2
StableServer Inc. has developed a very stable server. StableServer has a probability of crash over one year of 6% while its competitor of 25% over the same period. StableServer has an operating cost/hour of $15; the competitor is cheaper and requires only $10. If the system crashes this issue will cost your company $100,000. You are planning to use this server for 2,500 hours. StableServer's price is $85,000. What is the EVC for StableServer?
a) Define and discuss the concept of Economic Value to a Customer.
[5 marks]
b) What is the differentiation value of the company StableServer? Define.
[5 marks]
c) Explain the situations in which you can set the prices close to ECV?
[10 marks]
d) Explain the situations in which you can set the prices well to ECV?
[10 marks]
Question 3
Identify a real-world company who could profit from an overhaul of their pricing strategy. Be prepared to embrace sectors that until now have not thought thoroughly hard and strategically about pricing (for example, consultants, lawyers, health providers, massage therapists, tax experts etc.).
Think about how you would revolutionize pricing in this industry using the techniques covered during the lectures.
Prepare a short report designed to persuade the Chief Marketing Officer/Chief Financial Officer in that industry of how this pricing strategy will revolutionize their profit model.
[30 marks]
2022-04-22