Question

TEXplor has purchased a 2-year lease on land adjacent to the land leased by
Clampett. The land leased by TEXplor lies above the same crude oil deposit. Assume
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? (3 mark

Answer 1

i. If the hotel is able to identify the members in each group, then it will maximize its profits by charging each group their reservation price(maximum willingness to pay). Here, group 1 is willing to pay 2500 for room and board and 500 for entertainment. Thus, hotel will charge group 1, the vacation package at price = 3000.

Whereas group 2 is willing to pay 1800 for room and board and 750 for entertainment. Therefore, hotel will charge vacation package to group 2 at price = 2550.

ii. The profit for AG here will be maximum. Profit = Vacation price - MC for each group. Thus, profit from group 1 will be 2000 and from group 2 will be 1550. Total profit will be 3550.

iii. If the hotel could not identify the members of each group, then it cannot charge a different price to different groups. Rather, he will have to charge a single price for each product. Thus, he will charge each product, the price equal to the maximum price quoted by the lowest bidder. hence a price of 1800 for room and board and a price of 500 for entertainment. Otherwise, he will lose customer.

iv. Here, the profit will be : Profit = Vacation price - MC for each group = 2300 - 1000 = 1300 from each group. total profit will be 2600.

v. If the hotel wants to charge a package price, then also the maximum price it can charge is the maximum amount quoted by the lowest bidder, i.e. 2550.

vi. Here, the profit will be: Profit = Vacation price - MC for each group = 2550 - 1000 = 1550 from each group. Total profit will be 3100.