The Amazing Restaurant is the only restaurant on Amazing Island. The restaurant provides dining services to two distinct market segments: local residents and tourists. In each market segment, the demand curve has constant elasticity. The price elasticity of the tourists’ demand is -1.33, while the price elasticity of the locals’ demand is -1.5. a. Suppose the marginal cost is constant for each market and equal to $15 per meal. What prices should the monopolist charge in each market segment? Hint: use the markup formula (P – MC) / P = -1/e. b. As part of an effort to encourage tourism in the island, the local government decided to subsidize the restaurant by $5 for every tourist who dines at the restaurant. What does that do to marginal cost(s)? What prices should the monopolist charge now in each market segment?
The Amazing Restaurant is the only restaurant on Amazing Island. The restaurant provides dining services to two distinct market segments: local residents and tourists. In each market segment, the demand curve has constant elasticity. The price elasticity of the tourists’ demand is -1.33, while the price elasticity of the locals’ demand is -1.5.
a. Suppose the marginal cost is constant for each market and equal to $15 per meal. What prices should the monopolist charge in each market segment? Hint: use the markup formula (P – MC) / P = -1/e.
b. As part of an effort to encourage tourism in the island, the local government decided to subsidize the restaurant by $5 for every tourist who dines at the restaurant. What does that do to marginal cost(s)? What prices should the monopolist charge now in each market segment?
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
