Question
5. Suppose Platinum and Diamond are two hotels that are located almost next to each in a popular tourist spot, on the beach. Suppose both
5. Suppose Platinum and Diamond are two hotels that are located almost next to each in a popular tourist spot, on the beach. Suppose both Platinum and Diamond have the same marginal cost equal to $100. Suppose demand for hotel rooms in this spot is given by Q = 4000 10p, where Q is the quantity demanded and p is the price of each room.
(a) Imagine a situation where Platinum and Diamond both have substantially large capacities, say, equal to 4500 rooms. What will be the price charged by each of these hotels and what is the profit earned by them?
(b) Imagine an alternative situation where Platinum and Diamond have lower capacities: Platinum has a capacity of 100 rooms while Diamond has a capacity of 200 rooms. What will be the price chosen by Platinum and Diamond and how much profit will each hotel make? Explain why your answers are different in (b) compared to (a).
(c) Now, imagine a third alternative scenario where the hotels have large capacities as in (a) but now only Diamond is opening a hotel in this spot while Platinum is open a hotel at a different spot, say, near downtown. Explain in words how and why the outcomes differ from them in (a).
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