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. Since the company is able to identify members from each group, it can charge the price discriminately for each group. For room and board, the price will be set according to each group's maximum willingness to pay, implying price for Group 1 to be 2500 and for Group2 to be 1800 given the cost of servicing of 1000. Similarly, for entertainment, the price will be set according to each group's maximum willingness to pay, implying price for Group 1 to be 500 and for Group2 to be 750 given the cost of servicing of 1000.

ii. The profit will be 2500 + 1800 + 500 + 750 - 1000*4 = 1550

iii. Since the company is unable to identify members from each group, it will have to charge the price according to a minimum of the maximum willingness to pay in each group for each respective service. In other words, for room and board, the price will be set according to group2's maximum willingness to pay, which is 1800 given the cost of servicing of 1000. Similarly, for entertainment, the price will be set according to group1's maximum willingness to pay, which is 500  given the cost of servicing of 1000.

iv. ii. The profit will be 1800 + 1800 + 500 + 500 - 1000*4 = 600