1. As the new general manager of the Grand Palladium Jamaica luxury all-inclusive resort, you are assessing your pricing policies. Currently, the price of a weekend stay is $2,000 per guest. You estimate the marginal cost of serving a guest at $1,600, and while your predecessor unfortunately did not leave you data from the pricing experiments and test marketing she performed, you do know that such experiments were done, and that your predecessor was competent.
2. What is your best estimate of the elasticity of demand for a weekend stay at the Grand Palladium?

Using the margin rule = P / (P- MC) = 2000 / (2000 - 1600 ) = 5(demand for weekend stay)

1. Your learned that at the current price, the resort is only 80% full on the weekends. Remembering the sense of belonging that you experienced in a crowded subway during the rush hour, you contemplate lowering the price so the resort is completely full. What is your back-of-the-envelope calculation for how much you need to lower the price?

Current demand elasticity at price 2000 is 5, to get 100% occupancy from 80% we need 25% increase.

Per elasticity, If price decreases by 5% at elasticity of 5 the occupancy will increase by 25%.

So suggested price is $1900 i.e lower price by $100 for full occupancy.

But this decrease will also change the elasticity, Using the margin rule = P / (P- MC) = 1900 / (1900 - 1600 ) = 6.33 (updated demand elasticity)

1. After some thought you cooled to the idea of full occupancy. Instead, you focused your energy and introduced a gift shop where vacationers can purchase tee shirts and other keepsakes. After some analysis, you learn that the average customer spends $100 in the gift shop, and your margin on gift shop items is about 50%. In light of this, how should you change the price of a weekend stay at the Grand Palladium? Assume that the demand is linear and that the resort capacity is 2,500 guests.

Since each customer is expected to spend on gift shop and MR - MC = $50.

P = (1600-50) * (6/5) = $1860