Question

A Cancún resort can sell two types of hotel rooms: normal rooms and luxury suites. They have two types of customers, price-conscious regular travelers, and wealthy trav- elers - they know they have different willingnesses to pay for rooms, but they cannot tell the difference between the two when they book rooms. This table represents willingness to pay for different customers and rooms: Regular Wealthy Normal Room $200 $250 Luxury Suite $225 $400 Assume there are 200 regular and 100 wealthy customers, and that their costs are minimal, so their goal is to maximize total revenue. (a) If they could only offer one type of room at one price, what is the maximum revenue they could earn? (b) If they offer both types of rooms at different prices, at what price should they offer both types of rooms? What is their total revenue?

Answer 1

a) They can earn a maximum revenue of $1,20,000. Resort must provide luxury suite at wealthy travelers rate. There are 200 regular travelers and 100 wealthy travelers. So, the maximum revenue they can earn will be 300 * $400 = $1,20,000.

b) The resort's aim is to maximise their profit. So, they can provide both type of rooms at different price. If the normal room will be provided at wealthy traveler's rate, ie, $250, both the travelers can adapt it easily. There is only a small variation in the rate of regular and wealthy travelers.

If the luxury suite will be provided at wealthy traveler's rate, ie, $400, wealthy travlers can adapt is easily and regular travelers will be choose normal room on behalf of luxury suite.

The total revenue they can earn will be $90,000.

Normal room at $250 can be affordable to regular travelers. So, $250 * 200 = $50,000

Luxury suite at $400 can be affordable to wealthy travelers. So, $400 * 100 = $40,000