Question

In: Economics

It is a “new normal” and Muay Thai center are re-opening for the public across Surabaya...

It is a “new normal” and Muay Thai center are re-opening for the public across Surabaya areas. For this reopening, the Tiger Muay thai in Surabaya adopts a pricing strategy that consists of an annual membership fee plus a surcharge per visit.

The demand for Tiger Muay Thai membership itself is Q = 8 − 2P and the manager knows that the marginal cost of each visit by a member is $1,00 (one dollar).

a. Which pricing strategy is the management of Tiger Muay Thai?

b. What should be the surcharge per member visit?

c. What do you think should be the annual membership for Tiger Muay Thai?

d. What would be the annual profit the program expects to make on an average member?

Expert Solution

a.

If the firm charges a membership fee and surcharge per visit the firm is adopting a two-part tariff strategy. A two-part tariff is a form of price discrimination where a monopolist charges a fixed lump-sum entry fee and a per-unit price to extract as much consumer surplus as possible and maximize profit. Thus, the management of Tiger Muay Thai adopted the pricing strategy called the "Two-part tariff".

b.

The surcharge per member visit in case of a two-part tariff is equal to the marginal cost of the firm. In this case, it is $1.00 per visit per customer.

c.

The membership fee must be equal to the consumer surplus at the surcharge price of $1.00 per consumer. The demand for the membership at $1.00 is

The demand for membership can be written as

Therefore, the consumer surplus is

Therefore, the membership fee must is $9.

d.

The annual profit is per customer is

Rahul Sunny answered 2 years ago

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