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HW2 and Handout Fall 2019

1. The student is asked to complete two assignments for their HW2: - Solve a pricing problem assuming resale is impossible where Z=$24 instead of $20. - Find the profit-maximizing prices for three demand groups using Solver with and without a resale constraint. 2. To find the optimal prices using Solver, the student must: - Set the objective cell to the profit function - Set the changing variable cells to the price cells - With no resale constraint, solve to find the prices - With a $20 resale constraint, add the constraint that P2 - P1 <= $20 and solve again.

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Zhen Wang
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19 views8 pages

HW2 and Handout Fall 2019

1. The student is asked to complete two assignments for their HW2: - Solve a pricing problem assuming resale is impossible where Z=$24 instead of $20. - Find the profit-maximizing prices for three demand groups using Solver with and without a resale constraint. 2. To find the optimal prices using Solver, the student must: - Set the objective cell to the profit function - Set the changing variable cells to the price cells - With no resale constraint, solve to find the prices - With a $20 resale constraint, add the constraint that P2 - P1 <= $20 and solve again.

Uploaded by

Zhen Wang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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HW2

Due October 30, Wednesday, 2 PM

1. See if you can do above case we just finished but in which Z = $24 rather than $20. Report
results.
2. a. Returning to the first part of this handout. Let’s again assume resale is impossible, so we do
not need to put in any constraint. However, let us now assume three demanders:
P1 = 90 – Q1
P2 = 110 – Q2
P3 = 130 – Q3
MC = 20 and zero fixed costs
Use Solver to find the profit-maximizing set of prices. Report results.
2.b. Same assumptions in part 2a, but now we will assume buyers can resell the good a
transactions cost of $8. Find the new solution. HINT: only need the constraint between the
highest demand group and the lowest demand group, that is, P3-P1.
Once you have set up the spreadsheet as described in the excel file, when now want to click on
the DATA tab in Excel. You should see Solver. If you do not, follow these steps: Under File,
choose “Options”. Click on “Add-Ins”. Under “Manage:” pick Excel Add-ins and “Go”. Once you
hit “Go”, it will give you Add-ins Available. Put a check mark in the box for “Solver Add-in” and
“OK”. You should now find the Solver icon under that Data tab.

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Solver

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Returning to your spreadsheet, once you have set it up as above, click on “Solver”. You will now see the
following box pop up called “Solver Parameters” (below). In the “Set Objective” box you type in the cell
for the objective function (in my spreadsheet, it is B14, since the profit function is what we are trying to
maximize). Next, type in the range of cells that correspond to the choice variables—in our case, the cells
corresponding to prices (b8:c8) in the box titled “By Changing Variable Cells”. For this first problem,
there are no constraints, so leave that part blank. Make sure the Max option is selected. Once you have
done all of this, choose “Solve” . This will cause the spreadsheet to automatically change to the solution
(see bottom half of spreadsheet below for the solution). It will also cause a pop up box “Solver Results”.
Select OK to keep the Solver Solution (we will talk about the Reports option in the future when we do
linear programming, for now, ignore).

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Here is another example.

Suppose there is some resale cost Z that consumers incur. In this example, suppose Z = $20. Thus, any
price gap more than $20 will create arbitrage opportunities for the low price consumers. For example at
the above solution of P1 =$60 and P2=$110, the low demand group could buy the good at $60, and
resell it at, say, $105 (undercutting the monopolist price). This low demand group would get a gain of
$105 minus (60+20) or $25. Thus, the monopolist would not be able to have price of gap of more than
$20 without causing this arbitrage activity. Another way of putting it is the firm must choose prices to
maximize profit subject to the constraint P2-P1 = Z = 20. Return to our spreadsheet, adding in cell D61,
which measures P2-P1.

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Repeat the above steps to find the solution: Click on Solver, put in “Set Objective” cell and “By Changing
Variable Cells” cell array (just like before). However, there is a new step. Where it shows “Subject to the
Constraints” click on the Add button.

After clicking Add, the following will pop up (see below). Under “Cell Reference” put in D61. In the
middle drop down menu choose “=”, and finally under “Constraint” type in G58. Then click on OK.

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Once you click on OK, it will take you back to this (below) with the constraint now showing up in the
constraint box. Now you can click Solve.

After you click solve, you will again get the new spreadsheet result (the solution) and the pop up “Solver
Results” (again choose OK for that screen). If you did this correctly you will see the following solution:

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