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

Willingness to pay of both the groups has been mentioned in the table below

1) Willingness to pay of group 1 of room and board and/or entertainment = 2500+500 = 3000

Willingness to pay of group 2  of room and board and/or entertainment = 1800+750 = 2550

If Management of AG Travel and Tour can identify the member in each group, then it would simply charge how much they are willing to pay. Therefore, it will charge GHC 3000 from group 1 and GHC 2,550 from group 2.

B) Profit that AG Travel and Tour is what the groups pay - what it costs AG Travel and Tour to provide the service.

The marginal cost of providing the service (room and board and/or entertainment) to each group is GHC 1000.

Profit from group 1: what Group 1 are being charged- how much it costs AG to provide the service =  3,000 - 1000 = 2,000

Profit from group 2: what Group 2 are being charged- how much it costs AG to provide the service =  2,550 - 1,000 = 1,550

Total profits = Profit from group 1+Profit from group 2 = GHC (2,000+1,550) = GHC 3,1550.

C) Since the Management of AG Travel and Tour cannot identify the member in each group, then it would charge the lower willingness to pay among both the group so that both the groups buy their services.

For room and rent, it would charge GHC 1800 (willingness to pay of group 2) and for entertainment it would charge GHC 500 (willingness to pay of group 1).

D) For room and rent, it would charge GHC 1800 (willingness to pay of group 2) and for entertainment it would charge GHC 500 (willingness to pay of group 1).

Since there are two groups, the profits =  2(1,800 + 500 ) - 2(1,000) = GHC 2,600.

E) If Management of AG Travel and Tour wants to charge a package price, then it would charge (1,800 + 750) = 2,550. This is because at this price, both group 1 and group 2 will buy the services. In this case, both group 1 and group 2 will buy the services as their willingness to pay is higher or equal to the price being charged.

If it charges GHC 3000, group 2 will no longer buy the services because the price is higher than their willingness to pay.

F) The profit that AG Travel and Tour makes if it charges the package price GHC 2,550 = 2(2550) - 2(1,000) = 3,100

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