Consider a riverboat tour company that holds a monopoly or near-monopoly position in a given market. The company is not operating at capacity, so is considering ways to increase unit sales.
The company has tried some different pricing strategies in recent months with the below results:
Month
|
Tour Price
|
Tours Given
|
Out-of-State
|
Local Tours
|
August
|
$39
|
420
|
360
|
60
|
September
|
$33
|
540
|
450
|
90
|
Using the total number of Tours Given, estimate the [arc] price elasticity of demand for tours.
Based on this elasticity, what would be the marginal revenue of further reducing price from $33?
Using the disaggregated out-of-state vs. local tour quantities at the two price levels, estimate the [arc] price elasticity of demand within each of the two market segments served by the company.
The company is considering offering a discount during certain off-peak periods to local riders. Based on these elasticities, calculate the optimal revenue-maximizing price ratio the company should set between the price charged to out-of-state vs. local riders (use Out-of-State / Local).
If the company plans to keep the price for out-of-state at $33, what should they charge locals?
Using these prices and the estimated elasticities for the two segments, calculate the marginal revenue earned from each of these segments (you should be able to verify they are the same).
If the riverboat company estimates their marginal cost per ride is $9, what should they do?