Question #304439

1. Suppose you are the manager of a Golf Club with monopoly power. A typical consumer’s

inverse demand function for your firm’s product is 𝑃 = 100 βˆ’ 20𝑄, and your cost function is C(Q) = 20Q.

(a) If you apply a two-part pricing strategy, how much would be the membership fee and the per unit price?

(b) How much additional profit do you earn using a two-part pricing strategy compared with single price strategy?


1
Expert's answer
2022-03-01T10:52:36-0500

𝑃=100βˆ’20𝑄𝑃 = 100 βˆ’ 20𝑄

C(Q)=20QC(Q) = 20Q

a) Applying two pricing strategies the per-unit price becomes the price at which price equals the marginal cost of production.

P=MC

100βˆ’20Q=20=4

P= 20

Membership fees= the area of the triangle above the MC curve, and the per-unit price becomes the price

Ξ”=12(100βˆ’20)(4βˆ’0)Ξ”=160Ξ” = 1 2 ( 100 βˆ’ 20 ) ( 4 βˆ’ 0 ) Ξ” = 160

b. If there was a single pricing strategy, then equilibrium will occur at MR = MC

MR=MC

100βˆ’40Q=20Q=2

P=60

The profit would have been

Ο€1_1 =TRβˆ’TC

Ο€1_1 =60Γ—2βˆ’20Γ—2

Ο€1_1 =120βˆ’40

Ο€1_1 =80

When there is two pricing strategy, profit is given as:

Ο€2_2 =(20Γ—4+160)βˆ’20Γ—4

Ο€2_2=80+160βˆ’80

Ο€2_2=160

Additional profit will be:

Δπ=Ο€2_2βˆ’Ο€1_1 =160βˆ’80=80




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