Richard\'s weekly demand for playing tennis is given by the following table: The

Question

Richard's weekly demand for playing tennis is given by the following table: The only tennis courts available are at The Annex Tennis Club where each player is charged $2 per hour (independently of whether the player uses the court for the whole hour or not). How much tennis does Richard play per week? What is, in money terms, his weekly consumer surplus from playing tennis? Explain. The Annex Tennis Club is considering a pricing scheme whereby individuals still pay $2 per hour of court time, but in addition they must also pay a mandatory membership fee. What is the largest fee The Annex Tennis Club could charge for a weekly membership without losing Richard as a customer? Explain. If the club increases the price of court time to $4 per hour, what will be the largest fee it could charge for a weekly membership without losing Richard as a customer? Explain. As an alternative pricing scheme, suppose that The Annex Tennis Club introduces a membership fee but does not charge members for court time (i.e.. members are entitled to unlimited use of the facility). What is the maximum fee Richard is willing to pay for a weekly membership under these circumstances? Explain.

Explanation / Answer

a. From the table, we see that $2 is associated with 3 hours. He's willing to pay $5 for 0 hours, $4 for the first hour, $3 for the second hour, and $2 for the third hour. But he only has to pay $2 for each of the hours. CS = (5-2) + (4-2) + (3-2) + (2-2) CS = $6 b. $6 is the largest tariff that Annex can charge. He will pay up to his consumer surplus. Increasing the price to $4 will change consumer surplus. CS = (5-4) + (4-4) CS = $1. If the price is $4, the maximum tariff can only be $1 to keep Richard as a customer. c. This implies a price of zero. CS = 5+4+3+2+1+0 CS = $15 The maximum tariff that can be charged is $15 without losing Richard. He derives $15 of consumer surplus from a free court. So, he is willing to pay up to $15 for it but not more.

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