Hastur Hospitality offers a quaint bed-and-breakfast (B&B) experience in the coastal city of Innsmouth in northeast...

 

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Hastur Hospitality offers a quaint bed-and-breakfast (B&B) experience in the coastal city of Innsmouth in northeast Massachusetts. Demand comes both from travelers visiting the town of Innsmouth as well as travelers visiting the nearby town of Dunwich. Demand for staying in Innsmouth is given by Q₁ = 24-P₁, where p, is the price that Hastur charges for staying at its B&B in Innsmouth. There is additional demand from Dunwich, and is given by Qp = 20 - Pi, so long as no B&B is present in Dunwich, which is currently the case. Hastur's marginal cost of service is 8. a) Your goal as the manager in charge of pricing is to maximize profit. What price will you set at your Innsmouth location? What is your expected profit? (15 points) A desirable piece of real estate in Dunwich has recently gone on sale; Hastur now has the chance to build a B&B in Dunwich as well, at a fixed cost of 40. Vacationers in Dunwich generate a demand for a B&B in Dunwich of Qp = 24 - PD, where Pp is the price charged at the Dunwich location; of course, building a B&B in Dunwich will completely eliminate demand from Dunwich for the Innsmouth facility. (The marginal cost of production for Hastur will be 8 at this site as well.) b) What pricing strategy will you use if you decide to expand, i.e., build a Dunwich facility? Is it profitable to build such a facility? Why or why not? (20 points) You now learn that your competitor, Nyarlathotep Accomodations ("Live like a pharaoh!") is also contemplating buying the property in Dunwich; if you pass on the opportunity, Nyarlathotep will then have a chance to enter (at the same fixed cost of 40) the Dunwich market. Nyarlathotep's cost of entry is the same as yours, 40, and his marginal cost of production is also 8. If Nyarlathotep enters, you will first set your price, and then he will set his. Note that the B&B in Dunwich will not take customers from the B&B in Innsmouth, nor will the B&B in Innsmouth take customers from the B&B in Dunwich. c) If Nyarlathotep enters, what will your pricing strategy be? What do you expect his pricing strategy to be? Will you now choose to enter the Dunwich market yourself? Why or why not? (25 points) Hastur Hospitality offers a quaint bed-and-breakfast (B&B) experience in the coastal city of Innsmouth in northeast Massachusetts. Demand comes both from travelers visiting the town of Innsmouth as well as travelers visiting the nearby town of Dunwich. Demand for staying in Innsmouth is given by Q₁ = 24-P₁, where p, is the price that Hastur charges for staying at its B&B in Innsmouth. There is additional demand from Dunwich, and is given by Qp = 20 - Pi, so long as no B&B is present in Dunwich, which is currently the case. Hastur's marginal cost of service is 8. a) Your goal as the manager in charge of pricing is to maximize profit. What price will you set at your Innsmouth location? What is your expected profit? (15 points) A desirable piece of real estate in Dunwich has recently gone on sale; Hastur now has the chance to build a B&B in Dunwich as well, at a fixed cost of 40. Vacationers in Dunwich generate a demand for a B&B in Dunwich of Qp = 24 - PD, where Pp is the price charged at the Dunwich location; of course, building a B&B in Dunwich will completely eliminate demand from Dunwich for the Innsmouth facility. (The marginal cost of production for Hastur will be 8 at this site as well.) b) What pricing strategy will you use if you decide to expand, i.e., build a Dunwich facility? Is it profitable to build such a facility? Why or why not? (20 points) You now learn that your competitor, Nyarlathotep Accomodations ("Live like a pharaoh!") is also contemplating buying the property in Dunwich; if you pass on the opportunity, Nyarlathotep will then have a chance to enter (at the same fixed cost of 40) the Dunwich market. Nyarlathotep's cost of entry is the same as yours, 40, and his marginal cost of production is also 8. If Nyarlathotep enters, you will first set your price, and then he will set his. Note that the B&B in Dunwich will not take customers from the B&B in Innsmouth, nor will the B&B in Innsmouth take customers from the B&B in Dunwich. c) If Nyarlathotep enters, what will your pricing strategy be? What do you expect his pricing strategy to be? Will you now choose to enter the Dunwich market yourself? Why or why not? (25 points)

Answer rating: 100% (QA)

a To maximize profit we need to find the price that maximizes total revenue minus total cost Total revenue is price times quantity which is 24 PQ where Q is the total quantity demanded from both Inns ... View the full answer