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La Durazno is the only resort hotel on a small desert island off the coast of South America. It faces two market segments: bargain travelers
La Durazno is the only resort hotel on a small desert island off the coast of South America. It faces two market segments: bargain travelers and high-end travelers. The demand curve for bargain travelers is given by Q1 = 400 - 2P1. The demand curve for high-end travelers is given by Q2 = 500 - P2. In each equation, Q denotes the number of travelers of each type who stay at the hotel each day, and P denotes the price of one room per day. The marginal cost of serving an additional traveler of either type is $20 per traveler per day.
- Under the assumption that there is a positive demand from each type of traveler, what is the equation of the overall market demand curve facing the resort?
- What is the profit-maximizing price under the assumption that the resort must set a uniform price for all travelers? For the purpose of this problem, you may assume that at the profit-maximizing price, both types of travelers are served. Under the uniform price, what fraction of customers are bargain travelers, and what fraction are high end?
- Suppose that the resort can engage in third-degree price discrimination based on whether a traveler is a high-end traveler or a bargain traveler. What is the profit-maximizing price in each segment? Under price discrimination, what fraction of customers are bargain travelers and what fraction are high end?
- The management of La Durazno is probably unable to determine, just from looking at a customer, whether he or she is a high-end or bargain traveler. How might La Durazno screen its customers (i.e., cause them to self-identify type through their choices) so that it can charge the profit-maximizing discriminatory prices you derived in question (3)?
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