Question

The Oila Vista resort is the only place in the country where you can play luxury golf while dodging tar balls. It maximizes its profits in the local market by charging pl= 18 for an hour of golf, and it estimates that the elasticity of demand in the local market is=−9/8. It wants you to advise them on how to use multi-market price discrimination to make the most money off of their out of town customers, who can be identified by driver’s license. Assuming that their marginal cost is constant and that the inverse demand of visiting customers is pv= 42−2qv, what price should the resort charge out of town guests?

(a)pv= 22 answer

(b)pv= 24

(c)pv= 20

Answer 1

Marginal cost (MC) should be calculated first with the help of price and elasticity of demand.

MC = P (1 + 1 / elasticity of demand)

       = 18 (1 + 1 / (-9/8))

       = 18 (1 – 8/9)

       = 18 {(9 – 8) / 9}

       = 18 × 1/9

       = 2

Now given, Pv = 42 – 2qv [Let, Pv = P and qv = Q]

TR = P × Q = 42Q – 2Q^2

MR = Derivative of TR with respect to Q

       = 42 – 4Q

The equilibrium is,

MR = MC

42 – 4Q = 2

4Q = 40

Q = 10 = qv

Now by putting this value in the demand function is to get price.

Pv = 42 – 2qv

      = 42 – 2 × 10

      = 42 – 20

      = 22

Answer: a