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The local zoo has hired you to assist them in setting admission prices. The zoo's managers...

The local zoo has hired you to assist them in setting admission prices. The zoo's managers recognize that there are two distinct demand curves for zoo admission. One demand curve applies to those ages 12 to 64, while the other is for children and senior citizens. The two demand curves are:

PA = 9.6 - 0.08QA
PCS = 4 - 0.05QCS

where PA = adult price, PCS = children's/senior citizens' price, QA = daily quantity of adults, and QCS = daily quantity of children and senior citizens. Crowding is not a problem at the zoo, so that the managers consider marginal cost to be zero.

a) If the zoo decides to price discriminate, what are the profit maximizing price  and quantity  for adults? What is the total revenue  in this sub-market?

b) What are the profit maximizing price  and quantity  for children/seniors? What is the total revenue  in this sub-market?

c) What is the elasticity of demand for adults  at the price and quantity calculated? What is the elasticity of demand for children/seniors  at the price and quantity calculated? (Think about why this may be the case.)

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Answer #1

Price discrimination means charging different set of customer different prices according to their utility and willingness to pay in order to maximise revenues and profits.

(a) We find total revenue equal to 288 with profit maximising quantity for adults to be 60 and price be 4.8.

(b) We find total revenue equal to 80 with profit maximising quantity for children and senior citizens to be 40 and price be 2.

(c)We find price elasticities for both adults and senior citizens and they come out to be unit elastic i.e., equal to 1. The reason for this is that the firm is doing price discrimination making everyone pay according to their utility which leads all the people to pay and elasticity of demand being 1.

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