Question

3. Breezy Point Lodge sits alongside Big Pelican Lake in northern Minnesota. It's surrounded by breathtaking acres of woods and water, and features lots of family activities to enjoy all year long, like golf, tennis, water sports, fishing, snowmobiling and cross-country skiing. Like many vacation resorts, Breezy Point has discovered the advantages of offering its services on an annual membership or "time-sharing" basis. To illustrate, assume that an individual vacationer's weekly demand curve can be written:

P = $5,500 - $2,000Q,

where P is the price of a single week of vacation time, and Q is the number of weeks of vacation time purchased during a given year. For simplicity, assume that the resort's marginal cost for a week of vacation time is $1,000, and that fixed costs are nil. This gives the following total and marginal cost relations:

TC = $1,000Q,

A.	Calculate the profit-maximizing price, output, profit level, and consumer surplus assuming a per unit price is charged each customer.
B.	Calculate the profit-maximizing price, output and profit level assuming a two-part pricing strategy is adopted for each customer.
C.	Now assume that fixed costs of $780,000 per year are incurred, and that 250 time-share customers ("owners") are attracted when an optimal two-part pricing strategy is adopted. Calculate total annual profits.

Answer 1