21 Jul WHAT IS THE LOSS IN EFFICIENCY DUE TO MONOPOLY OF THE SPA ON CAMPUS?
much about economi Show more Suppose a new spa is going to open on SFU Burnaby campus. The owner does not know much about economics and therefore hires you as a consultant. Your job is to write a report that answers the following questions. You should include all your calculations in the report in case the spa owner wants to check them. Suppose customers can get any fraction of a full-massage. These are the facts that the owner has gathered: Marginal cost of a massage for the spa is $20. There are two potential groups of customers: students and university employees. Each students inverse demand for massages is given by: Ps = 705Qs. Each employees inverse demand for massages is given by: Pe = 80 3Qe. There are equal numbers of potential customers in each group. (a) If the spa serves students only what is the profit maximizing price per massage? How many massages does a student get? What is the loss in efficiency due to monopoly of the spa on campus? (b) If the spa owner wants to run a membership program for the students only such that each student has to pay both a membership fee and a price per massage what would the profit maximizing price for a massage be? How much should the membership fee be? Is the number of massages that a student gets efficient? What is the students utility? (c) From now on we will consider serving both students and employees. Suppose the owner wants to charge a uniform price for students and employees. Find the aggre- gate demand and marginal revenue functions. What is the profit maximizing uniform price? How many massages will each group get? What is the owners profit? (d) If the owner wants to price discriminate but cannot distinguish students from em- ployees what kind of pricing policy do you suggest? Do customers get efficient number of massages? please explain briefly but precisely. How many types of constraints does the profit maximization problem have? Explain verbally what purpose each type of constraints serve. Which of the constraints bind and which dont? (e) If the students can be distinguished from employees (possibly by checking IDs) what price should be charged for students? What price should be charged for employees? How many massages does each get? What is the owners profit? Show less
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