1. White Mountain Ski Resort (WMSR) has the following demand equations for its customers.
[Connecting the final exam with the first mid-term exam in terms of price elasticity concept]
The demand equation for the resort is as follow with MC of $10.
Q = 1,000 - 30P with corresponding P = 33.33 - 0.033Q with MR = 33.33 - 0.067Q
- What price should WMSR charge? What is the operating profit, Q x (P - V) ignoring fixed cost for simplicity. Note that V = MC in this case, being linear.
- You are a new manager of WMSR and learned that your customer consists of local skier as well as out of town skier. Can you do better than the former manager given this new information about your customers? Here just state how and why you could do better before you crunch number.
- You took Economic Analysis course in your MBA degree and you found out that:
The demand equation for Out of Town Skiers is Qo = 500 -10P with corresponding P = 50 - 0.1Q with MR = 50 - 0.2Q
The demand equation for local skiers is Ql = 500 - 20P with corresponding P = 25 - 0.05Q with MR = 25 - 0.1Q. VC = MC is still $10 for both skiers.
What are the respective prices you are going to charge for local and out of town skiers? How many local and out of town skiers would you get with your new pricing strategy?
- Compare your new operating profit with that of your former manager and analyze why your strategy is better than that of your former manager as much in detail as you can? Here you need to analyze the numbers you got in (c) and explain why operating profit is greater than that of your former manager.
- As a promotion for out of town skiers, WMSR decided to offer free skiing for first day if they stay more than one night at the resort hotel on its premise. What is the maximum number of skiers the company can expect if they are going to waive $10 marginal cost as incentive, i.e., MC = 0? Do not consider the extra lodging revenue.
- What would be the price to charge if the maximum number shows up?
- Suppose only one half of the maximum number of out-of-towners showed up. What is the price to charge?
- Compare the price to charge for the maximum and the price to charge for one half of the maximum. What can you say about those one half customers in view of the price difference?
- What could WMSR do with this information in the future in dealing with those one half customers? What could be your one recommendation which will the benefit WMSR?
- Compute operating profit of this promotional free skiing for one half of the maximum customers? Is this a smart strategy even if only one half showed up? This question is akin to' martine' pricing of Broadway Show in NYC at discount during day time. Do not consider the extra revenue for one more night stay considered in order to focus on the impact of the promotional strategy only.
- Compare the operating profit of the two cases, the maximum number and only the half of the maximum number.
- Should WMSR be disappointed with the fact that only one half of the maximum number of customer showed up? Here you compare the operating profit of the maximum and only one half of the maximum.
- Was the fact that only one half of the maximum number showed up a boon to the resort or not in spite of the initial disappointment? Explain why.