Question

1. Let us assume that there are two visitors, A and B, in an amusement park. The demand curve for the visitors facing the amusement park are as follows.

P_A= 5 – 2Q_A

P_B= 2.5 – 0.5Q_B

Marginal cost (MC) to serve each visitor is equal to $1.

1. Solve for P_A, P_B, Q_A and Q_B assuming MR=MC.

2. Calculate price elasticities of demand using Mark-up pricing formula. [Hint: use P_A, P_B and MC to solve for elasticities for visitor A (e_A) and visitor B (e_B). Each elasticity must be negative]. Mark-up pricing rule to calculate elasticities.

PA=MC/1+1eA

PB=MC/1+1eB

3. Which visitor is likely to pay more, more elastic or less elastic? Explain why.

4. Which visitor is likely to pay less, more elastic or less elastic? Explain why.

Answer 1