ECONOMICS 3310 - University of Texas _ BE 300 FA 2021 Problem Set 3

ECONOMICS 3310 - University of Texas _ BE 300 FA 2021 Problem Set 3 LegalEagle, Inc. is a risk neutral insurance company specializing in legal insurance. For a flat annual fee, they provide legal do cument review, legal advice, and a trial defense services. They sell these services through the internet and have no ability to discriminate across customers. There are 4 types of customers in the market for flat flee legal representation and they each make up 25% of the total customer base. The total cost of legal services for each type is as follows: x Low User: Customers that will use only $200 of legal services, e.g. writing a will. x Medium User: Customers that use $400 of legal services, e.g. writing a will and traffic ticket disputes. x High User: Customers that will use $800 of legal services, e.g. wills, traffic tickets, and document review x Power User: Customers that will use $1600 of legal services, e.g. all of the above services and a legal trial. The customers know what their expected demand for legal services will be next year, but LegalEagle does not. a. What is the expected cost of serving all 4 customers? b. If LegalEagle charges a flat fee of $750 which customers will sign up? How does their risk profile affect whether they will sign up? Will this be a profitable pricing strategy for LegalEagle? c. If Legal Eagle charges a flat fee of $466.67 which customers will sign up? Will this be a profitable pricing strategy for Legal Eagle? d. If Legal Eagle charges a flat fee of $1600 which customers will sign up? Will this be a profitable pricing strategy for Legal Eagle? e. If Legal Eagle charges a flat fee of $3000 which customers will sign up? Will this be a profitable pricing strategy for Legal Eagle? 2. Hot chocolate is a hot commodity at Michigan football games, especially when it is cold out. Football fans face limited options once inside the stadium, but they know that there are highand low-quality hot chocolate kiosks. If fans were fully informed, they would be willing to pay $6 for a high-quality hot chocolate and $3 for a low-quality hot chocolate. a. Suppose fans know there are equal numbers of low- and high-quality hot chocolate kiosks. Low-quality kiosks are willing to sell hot chocolate at prices above $3. Highquality kiosks are willing to sell hot chocolate at prices above $6. What would a fan be willing to pay for a cup of hot chocolate? Which kiosks choose to sell hot chocolate at this price? b. Suppose now that there are unequal numbers of low- and high-quality hot chocolate kiosks and fans are still willing to pay $6 for a high-quality hot chocolate and $3 for a low-quality hot chocolate. At these two demand levels, 50 high-quality hot chocolates and 100 low-quality hot chocolates would be sold to fully-informed consumers