Question

Pole Position, a retailer at Destiny Mall, has a variable cost of $5 per lap driven. It has identified two segments of customers: Hard-Core drivers and Just-For-Fun drivers. For simplicity, throughout this problem, assume there is exactly one customer in each of the two segments. Market research has revealed how each segment values the experience, depending on how many laps are raced:

# of Laps	Hard-Core Total Benefit ($)	Just-For-Fun Total Benefit ($)
1	$15	$25
2	$29	$37
3	$42	$43
4	$54	$48
5	$65	$50
6	$74	$51
7	$81	$50
8	$87	$40
9	$90	$20
10	$89	$10

8. Suppose Pole Position offers customers two options: Package A provides a customer a 3-lap race for $42.99; Package B provides a customer a 8-lap race for $86.99.

1. Which package would a Hard-Core driver buy?
2. Which package would a Just-For-Fun driver buy?
3. How much profit would Pole Position earn from this pricing strategy consisting of a menu of two packages?.
4. How does the profit from 8c compare to the profits from the previous pricing strategies?

Answer 1

a) For a hard-core driver the total benefit is maximised when he race for 9 laps and his total benefit received is equal to $90. So A hard-core driver would buy Package B of 8-lap race for $86.99 because this package gives him the benefit of $87 which is greater than the cost and is near to his maximum benefit.

b) For a just-for-fun driver the total benefit is maximised when he race for 6-laps and his total benefit received is equal to $51. So A just-for-fun driver would buy Package A of 3-lap race for $42.99 because this package gives him the benefit of $43 which is almost equal than the cost and is near to his maximum benefit.

c) From package-A pole position's total revenue is equal to $42.99 and his Total cost of providing a 3-lap race is equal to 3*$5 = $15. Therefore, his profit = $42.99 - $15 = $27.99. Similarly, From package-B pole position's total revenue is equal to $86.99 and his Total cost of providing an 8-lap race is equal to 8*$5 = $40. Therefore, his profit = $86.99 - $40 = $46.99. Therefore, his total profit is equal to $27.99 + 46.99 = $74.98

Part-d cannot be answered from the given information, for this we need previous pricing strategies.