Question

In: Economics

Consider an island served by a single ferry company. There are two types of people who...

Consider an island served by a single ferry company. There are two types of people who visit

the island, day-trippers who come in the morning to enjoy the island’s beaches on a Saturday or

Sunday (or sometimes on a weekday) and permanent summer residents who work in the city

during the week but come to the island on Friday night to spend the weekend and then leave on

Monday to return to work. The ferry has the following rate schedule: $6.50 for a same-day round

trip or $5.00 for a one-way trip. There are no round-trip savings for people who do not want to

travel on the same day.

a) Given the description of the two groups who visit the island, what kind of price

discrimination, if any, could work here?

b) What will be the price of a round-trip ticket for the permanent summer residents?

c) Is the rate schedule that the ferry company currently uses an effective price discrimination

device? Why or why not?

Solutions

Expert Solution

Price discrimination refers to the strategy offered by firm for charging different prices for the similar product from different customers in order to maximize profits.

a) Here the firm discriminating price on the basis of time. A person returning on same day is charged at different rate whereas a person returning after a gap of few days is charged at different rate. Price Discrimination strategy is satisfactory but prices can be changed to increase profits.

b) For permanent summer residents for a round trip which starts on Friday night till Monday will cost $5.00 +$5.00 = $10.00

c) The rate schedule is not effective.

Case One if A is Permanent Resident and B is Day Tripper

A will pay = $5+$5 = $10

B will Pay = $ 6.50

Total Money Earned = $10+$6.50 = $16.50

Lets assume Case 2 where Prices are Interchanged

A will Pay = $6.50 +$6.50 = $13

B will Pay = $5.00

Total Money Earned = $18.00

In second case Profits are more as compared to first case.

For Day Trippers $5.00 for same day round trip should be charged. Since , they are only for one day and they will have to return on the same day due to work commitments or any other reason .So, less price should be charged.

For Permanent Summer Residents $ 6.50 for one way trip should be charged. These residents will pay higher price also as once they have gone to island's beaches they will definitely return back after two days. For this they will have to use ferry. So, paying a higher price will not hurt them.

Rahul Sunny answered 1 year ago
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