Question

KLM has identified two groups of individuals that would be interested in the vacation package consisting of room and board and/or entertainment. The maximum amount that group 1 is willing to pay for room and board is $2500 and for entertainment is $500. For group 2, the maximum amount they are willing to pay for room and board is $1800 and for entertainment is $750. Although KLM is not able to identify

members of either group, it does know that each group values the components of

the package differently. Assuming there are an equal number of members in each

group and that the total membership in each group is a single individual. If the

marginal cost of providing the service (room and board and/or entertainment) to

each group is $1000.

i. How much will the hotel charge members of each group for the vacation

package if it could identify the members in each group?

ii. How much will the profit for KLM be?

iii. Since KLM is not able to identify members of each group,

what price should it charge for each product?

iv. What will be the profit for KLM in the case of (iii) above?

v. If KLM wants to charge a package price, what is the highest

price it can charge?

vi. What profit will KLM make if it charges the package price

found in (v) above?

Answer 1