Joe has just moved to a small town with only one golf course, the Northlands Gol

Question

Joe has just moved to a small town with only one golf course, the Northlands Golf Club. His inverse demand function is P 140-2, where q is the number of rounds of golf that he plays per year. The manager of the Northlands Club negotiates separately with each person who joins the club and can therefore charge individual prices. This manager has a good idea of what Joe's demand curve is and offers oe a spec a deal where Joe pays an annual membership 00 and can play as many rounds as e wants at 40 which s e margina st is und impose son h· ul. what membership e ould maximize prfor the Club? The manager could have charged Joe a single price per round. How much extra profit does the Clubea by using two-part pricing? The profit-maximizing membership fee (F) is $2500 (Enter your response as a whole number.) The Club's extra profit (above what its profit would have been from charging a single per-round price) is Eer your response as a whole number.)

Explanation / Answer

Two-part pricing is where a firm charges a lump sum fee from consumers for the right to buy as many units customers want at specified price. Here the optimal two part price for the firm is to charge a price equal to marginal cost(=$40).

Now, the firm should set lumpsum fee equal to the consumer surplus(CS) of Joe. Consumer surplus is the area under the Demand Curve and above the per round price.

(When P = $40, therefore Q = 50 units.)

Consumer Surplus, CS = (1/2)*50*(120 - 20) = $ 2500

If the firm charges a single-price, then the firm maximizes profit by setting marginal cost(=$40) equal to marginal revenue.

TR = PQ = 140Q - 2Q2

MR = 140 - 4Q

Setting MR equal to MC

140 - 4Q = 40

4Q = 100

Q* = 25 units (Profit Maximizing Output)

Profit Maximizing Price, P* = 140 - 2×25 = $ 90 / unit

Profit = (P* - MC)Q* = (90 - 40)*25 = $ 1250

Difference in profit = profit from two part tariff - Profit from single price

Difference in Profit = $ 2500 - 1250 = $ 1250.

Answers profit maximizing membership fee $ 2500

Extra profit = $ 1250

Related Questions

Navigate

• Browse (All)
• Browse J
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.