Question

Practice question:

Note: Demand is stated word for word like that on the practice question

Estimated consumer demand

Tourists’ demand in the market is estimated to be, QT (P) = 1500 − P

Locals’ demand in the market is estimated to be, QL(P) = 4000 − 4P

-Where P represents the price of a ticket in dollars. It is easy to identify locals, who can present proof-of-address to qualify for cheaper tickets. There is no danger of re-sale between groups. It is estimated that it will cost the tourism operator $20 to make each ticket available, and that there will be no fixed costs. Apart from the annual Ecological Tourism Licence fee (E).

-Show working out

A) Derive the combined demand function for the market.

B) Using the information provided in the scenario, derive the tourism operator’s total cost function. Exclude the cost of the annual licence fee.

C) Assume that the profit-maximising price is above the “choke-price” for locals. Find the profit-maximising quantity and price (Q and P). Is this price consistent with the assumption?

D) Assume that the profit-maximising price is below the “choke-price” for locals. Find the profit-maximising quantity and price (Q and P). Is this price consistent with the assumption?

E) What is the level of producer surplus under uniform pricing?

F) How many tickets will be available to locals, and what is the level of local consumer surplus (CSL)?

G) How many tickets will be available to tourists, and what is the level of tourist consumer surplus (CST )?

H) What is the profit-maximising quantity and price for the local market (QL and PL)? What is the level of consumer surplus in the local market (CSL)?

I) What is the level of consumer surplus in the tourist market under price discrimination (CST )? Clearly reference any results or calculations from previous steps.

J) What is the level of producer surplus under price discrimination?

Answer 1

We are given demand function of both the markets. Hence, combined market function is given by simply adding both the demand curve.

Since there are no fixed costs, only marginal cost of $20 is considered to calculate total costs and profit maximizing outcomes.

Price discrimination results in both the markets having their respective prices, dependent on their respective demand functions.