The Fun-Land Amusement Park is a 40-acre fun park full of rides, shows, and shops. Fun-Land's marketing department seg
The Fun-Land Amusement Park is a 40-acre fun park full of rides, shows, and shops. Fun-Land's marketing department segments its customer base into two parts: local patrons and tourists. Fun-Land assumes local patrons are more price sensitive than out-of-town tourists. Yearly demand and marginal revenue relations for overnight lodging services, Q, are as follows:
PL = $40 ï€ $0.0005QL
MRL = TRL/ QL = $40 ï€ $0.001QL
PT = $50 ï€ $0.0004QT
MRT = TRT/ QT = $50 ï€ $0.0008QT
Average variable costs for labor and materials are constant at $20 per unit.
A. Assuming the company can discriminate in pricing between locals and tourist customers through coupons distributed to locals via local shops, calculate the profit-maximizing price, output, and total profit contribution levels.
B. Calculate point price elasticities of demand for each customer class at the activity levels identified in part A. Are the differences in these elasticities consistent with your recommended price differential? Explain.