Question

6. There are two types of consumers or vacationers of a monopoly hotel in a resort town: type 1, of which there are 300 consumers willing to pay V¬¬1 = $600 per day; and type 2, of which there are 500 consumers, willing to pay V¬¬2 = $200 per day. The daily unit cost of serving a consumer is $50 per day, plus there is a fixed cost of $5,000 per day.

a. (5 points) What price will the hotel set and how many consumers will be served? What is the hotel’s daily profit and what is consumer surplus?

b. (10 points) Suppose a marketing campaign targeted to type 2 consumers can raise their willingness to pay to $350 per night. What is the maximum amount that the hotel would pay per day to run the campaign? If the campaign costs less than this amount and the firm engages in it what is the effect on consumer surplus?

c. (10 points) Now suppose that there are 850 consumers willing to pay V¬¬2 = $200 per day. Everything else is the same. How do your answers to a) and b) change in this case?

Answer 1