The Heritage Club at Harbor Town offers elegant accommodations for discriminating vacationers on Hilton Head Island, South
Question:
P = $6,500 - $1,250Q,
MR = ∂TR/∂Q = $6,500 - $2,500Q,
Where P is the price of a single week of vacation time, and Q is the number of weeks of vacation time purchased during a given year. For simplicity, assume that the resort’s marginal cost for a week of vacation time is $1,500, and that fixed costs are nil. This gives the following total and marginal cost relations:
TC = $1,500Q,
MC = ∂TC/∂Q = $1,500.
A. Calculate the profit-maximizing price, output, profit, and consumer surplus assuming a uniform per unit price is charged each customer.
B. Calculate the profit-maximizing price, output and profit assuming a two-part pricing strategy is adopted for each customer.
C. Now assume that fixed costs of $4 million per year are incurred, and that 500 time-share customers (“owners”) are attracted when an optimal two-part pricing strategy is adopted. Calculate total annual profits.
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