You own the only amusement park in your area and each potent

You own the only amusement park in your area, and each potential visitor’s

demand for amusement park rides has been estimated to be:

Qd(P)=10-P

Where prices are in dollars per ride and quantities are in rides per customer per visit.

Your marginal cost of providing canoe rentals is MC=$3. You have decided to use a two-

part pricing scheme, where each visitor must pay an entrance fee to enter the park plus a

charge per ride once inside. Use the attached trade panel to guide you through the process.

a. What is the profit maximizing level of the entrance fee?

b. How much do we charge per ride?

Solution

a)

Qd = 10 - P

MC= 3

P = 10 -Q

Equilibrium:

10 - Q = 3

Q = 7

P =3

CS = 1/2(10-7)(7)

= .5 (7)(7)

= 24.5

Hence, Entrance fee = $ 24.5

B)

Charge per ride:

10 -Q = 3

Q = 7

P = 3

Price per ride = $ 3