You are the manager of the Santa Cruz Boardwalk Amusement Park, in Santa Cruz, CA, which offers a number of thrill rides to tourists. You consider your self a monopolist. All of your consumers have identical preferences, and a typical consumer’s inverse demand function for rides in your amusement park is P = 42 – 10*Q, where Q is the number of rides and P is the price per ride. Your cost function is C(Q) = 2*Q (i.e. MC = $2).
a) What is the optimal “linear” (i.e. standard) price that you could charge? What would your profit be in that case?
b) Now suppose you could charge a two-part tariff that includes a fixed fee for entering the amusement park and a price per ride. What would be the optimal fixed fee and price per ride? How much more or less profits would you make in this compared to the case of linear pricing examined in part a)? c)Draw two figures with the demand curve and the MC curve. In the first one, represent your answers to part a), including the MR curve, and equilibrium output, price and profit per consumer. In the second figure, represent your answers to part b) including equilibrium output, price and profit per consumer. Comment briefly.