Question

The following is from an article in the “Overheard” section in the Wall Street Journal:

“Hi, I’m a Mac.”

“And I’m a PC.”

“I like to stay in those posh hotels with free coffee and 700-threadcount sheets.”

“I like to stay at Motel 6.”

That is the latest revelation about the great computing divide, courtesy of Orbitz Worldwide CEO Barney Harford. Touting his company’s ability to differentiate itself by slicing and dicing customer data; he let on that those booking hotel rooms using Apple computers pay on average $20 more a night. The explanation could be simple: Anyone who pays a 50% or so premium for a MAC has more money to begin with. Either that or they are the ideal consumer – the type who pays through the nose for a brand.

a.    All else equal, the data could suggest the demand for Mac computers has higher income elasticity than the demand for PCs.

b.    When the author writes MAC buyers will “pay through the nose for a brand”, he/she assumes the computers are close or perfect substitutes.

c.    If consumers will “pay through the nose for a brand”, the demand curve for branded products should be relatively inelastic compared to non-branded products.

d.    All of the above answers are correct.

e.    Only answers a. and b. are correct.

Answer 1

Option D

(a) The above data suggests that demand for Mac computers has higher income elasticities as compared than demand for PCs.

As income rises the demand for Mac computers too rises. From above the statement the average $20 paid by consumers for booking Hotel room with Apples suggested their purchasing power.

(B) Both products are close substitutes because the utility derived and usefulness by using it is similar. The very objective of establishing MAC and PCs. But by the statement pay through the nose which means consumer ready to give exorbitant prices for one over other due to their preferences and branding of the product. This shows the loyalty and inclination of consumer towards one brand.

(C) The demand curve would be relatively less elastic as compared to non branded products. Which means even though prices rises for branded MAC computers

( Status Symbol Product) and most preferably by consumers , demand would not be affected much.

All the above statement are true.