Question

Management of AG Travel and Tour has identified two groups of individuals that
would be interested in the vacation package consisting of room and board and/or
entertainment. The maximum amount that group 1 is willing to pay for room and
board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximum
amount they are willing to pay for room and board is GHC 1800 and for
entertainment is GHC 750. Although AG Travel and Tour is not able to identify
members of either group, it does know that each group values the components of
the package differently. Assuming there are an equal number of members in each
group and that the total membership in each group is a single individual. If the
marginal cost of providing the service (room and board and/or entertainment) to
each group is GHC 1000.
i. How much will the hotel charge members of each group for the vacation
package if it could identify the members in each group?
ii. How much will the profit for AG Travel and Tour be?
iii. Since AG Travel and Tour is not able to identify members of each group,
what price should it charge for each product?
iv. What will be the profit for AG Travel and Tour in the case of (iii) above?

v. If AG Travel and Tour wants to charge a package price, what is the highest
price it can charge?
vi. What profit will AG Travel and Tour make if it charges the package price
found in (v) above?

Answer 1

i. If the hotel could identify members of each group, it could easily charge the maximum amount that each group is willing to pay for the services. Group 1 is willing to pay GHC 2500 for room and board and GHC 500 for entertainment. Thus, it will be charged GHC 3000 for all three services combined.

Group 2 is willing to pay GHC 1800 for room and board and GHC 750 for entertainment. Hence, it will be charged a total amount of GHC 2550.

ii. The marginal cost of each customer for AG Travel and Tour is GHC 1000. It charges the maximum amount of GHC 3000 and GHC 2550 from group 1 and group 2 respectively. Its profit therefore will be =

(3000 + 2550) - (1000 + 1000)

= 5550 - 2000

= GHC 3550

iii. Since AG Travel and Tour is not able to identify the groups, it should charge the minimum of the two groups maximum paying limit. This is so because if AG chooses the higher value, the group with lower purchasing power will not buy its products.

Thus, for room and board it should charge GHC 1800 and for entertainment it should charge GHC 500, which are the minimum of the two groups' purchasing power.

iv. In iii. above, the total amount that AG Travel and Tour is charging is GHC 2300 (1800 + 500). Since its marginal cost is GHC 1000, the profit will be =

(2300 * 2) - (1000 * 2)

= 4600 - 2000

= GHC 2600

v. If it wants to build a package, again, AG Travel and Tour should build it using the minimum of the total amount that both the groups are willing to pay. Group 1 is willing to pay GHC 3000 while group 2 is willing to pay GHC 2550 for both the services combined. Thus, it should charge GHC 2550 as a package from both groups of customers. This package lies within the paying range of both of them.

vi. If AG Travel and Tour charges GHC 2550 for the package, and given that marginal cost is GHC 1000, its profit will be =

(2550 * 2) - (1000 * 2)

5100 - 2000

= GHC 3100