Question

You are the manager of a golf course. A typical member’s inverse demand function for weekly visits (Q) is known to you and is given as P = 100 – 20Q, where P is the fee charged for each visit. Your cost function is C = 20Q.

i. If you operate your business as a single price monopolist, what fee you will charge for each visit and what profit you will earn?

ii. Acting as a single-price monopolist (as above), calculate your monopoly power in the market by computing the Lerner’s Index. What is the price elasticity of demand? How much deadweight loss you cause to the society?

iii. If instead, you adopt a two-part pricing strategy, what profit you will make and how will you do your pricing? What will be the deadweight loss now?

Answer 1