Price Discrimination. The Do-Drop-Inn, Inc. provides vacation lodging services to both family and senior citizen customers. Yearly demand and marginal revenue relations for overnight lodging services, Q, are as follows:
Family: PF = $40 - $0.0004QF
MRF = ∂TRF/ ∂QF = $40 - $0.0008QF
Senior Citizens: PS= $30 - $0.00025QS
MRS = ∂TRS/ ∂QS = $30 - $0.0005QS
Average variable costs for labour and materials are constant at $20 per unit.
A. Assuming the company can discriminate in price between family and senior citizen customers calculate the profit-maximizing price, output, and total profit contribution levels.
B. Calculate point price elasticities of demand for each customer class at the activity levels identified in part A. Are the differences in these elasticities consistent with your recommended price differential? Explain.