Question

OPIIONAL Ouesti ne lour business in Boston. Vincent operates a scenic tour business in Boston. He has one bus which can fit 50 people per tour and each tour lasts 2 hours. His total cost of operating one tour is fixed at $450. Vincent's cost is not reduced if he runs a tour with a partially full bus. While his cost is the same for all tours, Vincent charges each passenger his/her willingness to pay: adults $18 per trip, children $10 per trip, and senior citizens $12 per trip. At those rates, on a typical day Vincent's demand is: Villingness to Pay emand per dav 70 25 assenger Ivpe dults hildren enior Citizens Assume that Vincent's customers are always available for the tour; therefore, he can fill his bus for each tour as long as there is sufficient total demand for the day. a) Vincent uses a pricing practice called? b) What is Vincent's cost of serving all passengers demanding a tour on a typical day? c) What is Vincent's profit on a typical day? d) One of Vincent's friends tells him he would be more profitable if he charged a single price of $18. Assuming no changes in consumer demand, what would Vincent's profit be if he charged every customer e) One of Vincent's friends tells him he would be more profitable if he charged a single price of $12. Assuming no changes in consumer demand, what would Vincent's profit be if he charged every customer

Answer 1

ANSWER:

(a)

When a firm charges a different price from each customer equal to willingness to pay of each respective customer then such pricing behavior is known as first degree price discrimination.

Vincent is doing the same.

Hence, Vincent uses a pricing practice called first-degree price discrimination.

(b)

On a typical day, a total of 150 people demand a tour service.

In one tour, Vincent can take only 50 persons. So, with total demand of 150 people, Vincent has to operate three tours.

His total cost of one tour is $450.

So, cost of operating 3 tours will be ($450 * 3)= $1,350.

Thus, Vincent's cost of serving all the passengers demanding a tour on typical day is $1,350.

(c)

Number of adults taking tour in one day = 70

Number of children taking tour in one day = 25

Number of Senior citizens taking tour in one day = 55

Price charged from adults = $18

Price charged from children = $10

Price charged from Senior citizens = $12

Calculate Total Revenue -

TR = ($18*70) + ($10*25) + ($12*55) = $1,260 + $250 + $660 = $2,170

Total cost = $1,350

Calculate Total profit -

Total profit = Total revenue - Total cost

Total profit= $2,170 - $1,350 = $820

Vincent's profit on a typical day is $820.

(d)

If Vincent charges every customer $18 then only adults will demand the tour service from Vincent. Children and Senior citizens will not demand the tour service because their willingness to pay is less than $18.

It has been provided that 70 adults demand tour service in a day.

So, at $18 per person, Vincent will be able to provide tour service to 70 persons.

This implies that bus has to make two tours, as in one tour bus it can take a maximum of 50 people.

One tour cost is $450.

So,

Total cost = $450 + $450 = $900

Total revenue = $18 * 70 = $1,260

Total profit = TR - TC = $1,260 - $900 = $360

Hence, the Vincent's profit would be $360 if he charged every customer $18.