What is a reservation price, (2) what do you think the reservation price should be for your store, and (3) what do you think the reservation price should be for manufacturer B?
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- A reservation price is the minimum price at which a seller is willing to sell a product and the maximum price at which a buyer is willing to buy a product. It represents the point at which the seller or buyer is indifferent between making the transaction and not Show more…
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Suppose you are running a furniture company that sells sofas. Customers come in two types: those who live in apartments and those who live in houses. Those who live in apartments presumably need less furniture than those who live in larger homes. Suppose that those who live in apartments have a reservation price of $1,000 for the first sofa and $0 for the second, third, etc. sofa. Those who live in houses have a reservation price of $1,200 for the first sofa, $500 for the second sofa, and $0 for the third, fourth, etc. For the following questions, assume there are just two consumers: one who lives in an apartment and one who lives in a house, and you cannot observe who is who. Also, assume that there are no costs associated with producing or selling a sofa. If you were only able to charge one price, no matter how many sofas a consumer buys, what price would you charge? If you were only able to charge one price, no matter how many sofas a consumer buys, what is the maximum possible revenue? If you could charge one price for one sofa and another price for those who buy two sofas at a time, what would you charge for one sofa? If you could charge one price for one sofa and another price for those who buy two sofas at a time, what would you charge for two sofas?
Akash M.
How does the reservation price reflect consumer value? Can you give examples as to whether a good produces value by comparing reservation price and opportunity cost?
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