The Do-Drop-Inn, Inc., provides vacation lodging services to both family and sen

Question

The Do-Drop-Inn, Inc., provides vacation lodging services to both family and senior citizen customers. Yearly demand and marginal revenue relations for overnight lodging services, Q, are as follows: Family PF = $40 - $0.0004QF MRF = $40 - $0.0008QF Senior Citizens PS = $30 - $0.00025QS MRS = $30 - $0.0005QS Marginal cost is constant at $20 per unit. a. Assuming the company can discriminate in price between family and senior citizen customers calculate the profit-maximizing price, output, and total profit contribution levels of senior citizens and families.

Explanation / Answer

MC= AVC= 20

LOCALS

MR1=MC

40-0.001 Q1= 20

Q1= 20,000

P1= 40-0.0005 (20 000)

=30

TOURISTS

MRt=MC

50-0.0008Q1=20

0.0008Q1=30

Q1=37,500

P= 50-0.0004(37,500)=35

PROFIT =P1Q1+ PtQt-AVC1(Q1 + Qr)

=30(20 000)+35 (37500)-20 (20 000+ 37500) =762 500

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Yes ahigher price for tourists customers is consistent with the lower degree of proce elasticity observed in that market

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