EX-3

An airline company operates a daily flight from Tel Aviv to London. The cost of flying the plane each direction is 100,000 dollars and the number of seats in the plane is 200. The Economics Department of the airline company calculated that the average cost of a seat is 500 dollars and thus it was decided that the minimum cost of a ticket is 500 dollars. One day 10 seats were still left unoccupied at about one hour before takeoff. Dafna came to the airport and agreed to pay only 300 dollars for the seat. Is it worthwhile for the company to sell her the ticket under these terms?

Dana is working full time and earns NIS 60,000 a year. She is considering registering for studies at the university and it is clear to her that she will be able to work only part time and earn NIS 20,000 a year. Dana checked and found that: The yearly tuition is NIS 35,000. The current annual expenses for books, writing utensils and miscellaneous is NIS 3,000.

a. What are the yearly costs of studies and what is the cost of the degree under the assumption that the studies are for 3 years (assume fixed prices and zero interest). b. Dana estimates that at the end of her degree the contribution of her studies to her annual income will be NIS 5,500 per annum. Since she will have 40 years of work left, this sum totals NIS 220,000. If her income is the only criterion that is guiding her to study, should she study? What is the minimal contribution to income which will make the studies worthwhile?

The firm's total cost function is: $TC(Q) = 5 + 40Q + 20Q^2$. Calculate the functions: AVC, ATC and MC. Illustrate them in a diagram.

A clever strategy firms with market power often use to extract consumer surplus is bundling. This involves selling two or more goods together. A good example to think about concerns season tickets to the symphony. Suppose, for the sake of argument, that the symphony plays three concerts in the season, one which is all Beethoven, one all Handel, and one modern music concert, featuring the work of Penderecki. Imagine that there are a number of consumers who might purchase tickets to these concerts. In particular, imagine that there are two seats that can be sold, and four consumers who might purchase them.

• Consumer 1 would pay $15 for Beethoven, $8 for Handel, and $0 for modern music.
• Consumer 2 would pay $8 for Beethoven, $3 for Handel, and $6 for modern music.
• Consumer 3 would pay $5 for Beethoven, $9 for Handel, and $12 for modern music.
• Consumer 4 would pay $3 for Beethoven, $3 for Handel, and $3 for modern music.

If we charge a different price for each individual concert, how much would we charge for Beethoven? Handel? The modern music concert? What would be our profit in this case?

If instead, we sold a season ticket to all three concerts, what would be the (profit maximizing) price? What would be the profit in that case?

Can you think of even a more profitable bundling strategy?

A profit maximizing firm produces three products X, Y and Z. The firm has no costs. There are three customers 1, 2 and 3. Each customer is willing to purchase at most one unit of each of the three products. The firm cannot price discriminate between customers. The following table presents the willingness to pay of each of the three customers for each of the three products:

So, for example, Customer 1 is willing to pay no more than $10 for purchasing one unit of product X and Customer 3 is willing to pay no more than $7 for purchasing one unit of product Z.

What will be the price of each product if the firm decides to sell them separately?

Suppose, instead, that the firm decides to sell the three products only as a bundle. What will be the price of the bundle in this case?

Which of the two alternatives above is better for the firm? Which of the two alternatives above is better for each of the three customers?

Can you think of a pricing and bundling strategy that is more profitable for the firm than the two strategies discussed above?