Solution for Managerial Economics 4th Edition Chapter 14, Problem 2

by Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
147 Solutions 23 Chapters 108745 Studied ISBN: 9781305259331 Economics 5 (1)

Chapter 14, Problem 2 : 14-2 German Brothels German brothels recently...

14-2 German Brothels

German brothels recently began offering a monthly subscription service for multiple purchasers. If you thought that the brothels’ encouragement of prostitution was immoral to begin with, would you consider this pricing plan to be even more immoral?

Step-By-Step Solution

14-2 This is a bundling mechanism. Traditionally, prices include a profit margin and price exceeds marginal cost. This means that there are unconsummated transactions that represent a value-creating opportunity. By pricing each visit at marginal cost, you increase usage and, therefore, consumer surplus. The monthly subscription charge is meant to capture some of this additional consumer surplus.

The result of such a pricing scheme is that the patronage of prostitutes increases. If you were morally opposed to some prostitution, then you are likely to be more opposed increased prostitution.

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