Question

In: Economics

ASSUME THAT MUSTAFA OPERATES THE ONLY SIGHTEEING TOUR BUSINESS IN NEW YORK, AND HE MAKES A...

ASSUME THAT MUSTAFA OPERATES THE ONLY SIGHTEEING TOUR BUSINESS IN NEW YORK, AND HE MAKES A LOT OF MONEY. HE HAS ONLY ONE BUS WHICH CAN FIT 50 PEOPLE PER TOUR AND EACH TOUR LASTS 2 HOURS. HIS TOTAL COST OF OPERATING ONE TOUR IS FIXED AT $450. MUSTAFA'S COST IS NOT REDUCED IF HE RUNS A TOUR WITH A PARTIALLY FULL BUS. WHILE HIS COST IS THE SAME FOR ALL TOURS. MUSTAFA CHECKS IS'S AND CHARGES EACH PASSENGER THEIR WILLINGNESS TO PAY BASED ON THEIR AGE: ADULTS $18 PER TRIP, CHILDREN $10 PER TRIP, AND SENIOR CITIZENS $12 PER TRIP. AT THOSE RATES, ON A TYPICAL DAY MUSTAFA'S DEMAND IS:

PASSENGER TYPE	WIILLINGNESS TO PAY	DEMAND PER DAY
ADULTS	$18	70
CHILDREN	$10	25
SENIOR CITIZENS	$12	55

ASSUME THAT MUSTAFA'S CUSTOMERS ARE ALWAYS AVAILABLE FOR THE TOUR; THEREFORE, HE CAN FILL HIS BUS FOR EACH TOUR AS LONG AS THERE IS SUFFICIENT TOTAL DEMAND FOR THE DAY.

A. WHAT IS THE MICROECONOMIC TERM(NAME) FOR MUSTAFA'S PRICING STRATEGY?

B. WHAT IS MUSTAFA'S TOTALCOST OF SERVING ALL PASSENGERS WANTING A TOUR ON A TYPICAL DAY?

C. WHAT IS MUSTAFA'S TOTAL PROFIT ON A TYPICAL DAY?

D. ANGELA TELLS MUSTAFA THAT HE WOULD MAKE MORE PROFITS IF HE CHARGED A SINGLE PRICE OF $18 PER TICKET. ASSUMING NO CHANGES IN CONSUMER DEMAND, WHAT WOULD MUSTAFA'S TOTAL PROFIT BE IF HE CHARGED EVERY CUSTOMER$18? DO YOU AGREE WITH ANGELA? EXPLAIN

E. EMILY TELLS MUSTAFA THAT HE WOULD MAKE MORE PROFITS IF HE CHARGED A SINGLE PRICE OF $12 PER TICKET. ASSUMING NO CHARGES IN CONSUMER DEMAND, WHAT WOULD MUSTAFA'S TOTAL PROFIT BE IF HE CHARGED EVERY CUSTOMER $12? DO YOU AGREE WITH EMILY? EXPLAIN

Solutions

Expert Solution

TC of a single tour= $450

50 passenger per bus per tour

A. As Mustafa is charging the maximum price that a particular consumer is willing to pay this type of pricing strategy is known as Perfect price discrimination or 1st degree price discrimination. It will cause zero consumer surplus and total surplus in a market is equals to producer's surplus.

B. To calculate the total cost each day:

Total demand in a day= 70+25+55= 150

As a single tour can take maximum to 50 people it means for 150 people there should be 3 tours in a day and each tour cost $450. So

Total cost= 3 x $450= $1350

C. For total profit:

Total revenue from adults= Willingness to pay x demand= $18 x 70= $1260

Total revenue from children= Willingness to pay x demand=$10 x 25= $250

Total revenue from Senior citizens= Willingness to pay x demand=$12 x 55= $660

Total revenue from total demand= 1260+250+660= $2170

Profit= Total revenue - total cost= 2170-1350= $820

D. If price =$18, then senior citizen and children will not demand anything because price is higher than their willingness to pay. So only adult will demand.

Total revenue= $18 x 70= $1260

There are 70 people so in 1st tour only 50 can go. So it require 2nd tour as well.

TC= $450 x 2= $900

Profit= 1260-900= $360

Not agree with Angela because single price of $18 cause profit to decrease.

E. If price =$12, then children will not demand anything because price is higher than their willingness to pay. So only adult and senior citizen will demand.

Total revenue= $12 x 70+$12 x 55= $1500

There are 125 people so in 1st tour only 50 can go. So it require 2nd and 3rd tour as well.

Total cost= $450 x 3= $1350

Profit=$1500-$1350= $150

Not agree with Emily because single price of $12 cause profit to decrease.

Rahul Sunny answered 2 years ago

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