Question One
Management of AG Travel and Tour 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 GHC 2500 and for entertainment is GHC 500. For group 2,
the maximum
amount they are willing to pay for room and board is GHC 1800 and
for
entertainment is GHC 750. Although AG Travel and Tour 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 GHC 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 AG Travel and Tour be?
iii. Since AG Travel and Tour is not able to identify members of
each group,
what price should it charge for each product?
iv. What will be the profit for AG Travel and Tour in the case of
(iii) above?
v. If AG Travel and Tour wants to charge a package price, what is
the highest
price it can charge?
vi. What profit will AG Travel and Tour make if it charges the
package price
found in (v) above? (3 m
i. The price charged when the firm is able to identify members of the group should be based upon each of the group's maximum willingness to pay for each respective service. Consequently, for room and board, the price for Group 1 should be 2500 and for Group 2 it should be 1800. Similarly, for entertainment, the price for Group 1 should be 500, and that for Group 2 should be 750.
ii. The profit in such a case would be 2500 + 1800 + 500 + 750 - 1000*4 = 1550
iii. The price charged when the firm is unable to identify members of the group should be based upon the lowest of the maximum willingness to pay for each group in each respective service. Consequently, for room and board, the price should be 1800. Similarly, for entertainment, the price should be 500.
iv. The profit in such a case would be 1800 + 1800 + 500 + 500 - 1000*4 = 600
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