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 can identify different groups of people, it will charge them the maximum prices that they would be willing to pay.

So, for the individuals of group 1, the price of the package would be (2500 + 500) = GHC 3000.

For the individuals of group 2, the price of the package would be (1800 + 750) = GHC 2550.

ii) There is one individual in each group, then the profit that AG tour and travel will make is =

= (3000-1000) + (2550-1000)

= 2000 + 1550

= GHC 3550

iii) We know that there are equal number of people in both the groups. So, if we keep the higher prices for both the products, then only group 1 people will buy the room and boarding facility and only group 2 people will buy the entertainment facility. The marginal cost of producing the services is given to be GHD 1000, irrespective of the number of products each individual buys. So, if there is only one individual in each group, the profit would be,

2500-1000 + 750 - 1000

=GHD 1250.

Now, if lower prices are taken, the each individual of both groups will buy both the products. So,if there is only one individual in both the groups, the total profit for the firm would be

((1800+500) - 1000) + ((1800+500)-1000)

= GHD 2600.

So, we can see that by considering the lower prices of the products, the profits will be higher.

So, the price for room and boarding should be

GHD 1800 and the price for entertainment will be GHD 500.

iv) So, we have seen that if there is only one individual in both the groups, the profit is GHD2600.

v) The maximum value that group 1 would be willing to pay for the package is (2500+500)

= GHC 3000.

The maximum value that group 2 would be willing to pay for the package is (1800+750)

= GHC 2550.

The marginal cost for a package is GHD 1000.

The maximum price that the company can charge would be GHC 3000, because if the package price is higher than this, then noone would choose to buy the packages.

vi) The profit AG Travel and Tour would make if it charges GHD 3000 for the package =

At this package price, only group 1 individuals will buy the package and we consider that there are n individuals in each group.

So, the profit made at this price =

= (3000-1000)

= GHD 2000

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