Mayo Destination Water Park Center offers family fun year-round in the Northstar state to locals and out-of-state visitors to the nearby Mayo Center. The demand for day-passes to the water park for...

There are a total of 50 points available on this individual assignment
Assignment 2 Dr. John Spry
Principles of Economic Analysis Spring 2013
Due: April 25
There are a total of 50 points available on this individual assignment. Be sure to clearly
explain your answers and show your work to receive full credit.
Late assignment opportunity cost: Deducts 3 points per day.
1. (10 points) Mayo Destination Water Park Center offers family fun year-round in the
Northstar state to locals and out-of-state visitors to the nea
y Mayo Center. The demand
for day-passes to the water park for each market segment is independent of the other
market segment. The marginal cost of providing service to each visitor is $5 per day.
Suppose the daily demand curves for the two market segments are:
Locals:
( )
Out of town:
( )
a. (4 points) If Mayo Destination Water Park Center charges one price to locals, what is
the profit maximizing price for locals? How many day-passes will be sold per day to
locals?
Answer:
Total revenue (TR
L
) from local market = *QL = 25QL – 0.005QL
2

Marginal revenue from locals (MRL) = dTRL/dQL = 25 - 0.01QL
Marginal cost (MC) = 5
At the profit maximization, marginal revenue equals marginal cost i.e.
MRL = MC i.e.
25 - 0.01QL = 5, implies profit maximizing output sold to locals (QL*) = 200
And profit maximizing price for locals (PL*) = 25-0.005*200 = 24
. (4 points) If Mayo Destination Water Park Center charges one price to out-of-towners,
what is the profit maximizing price for out-of-town guests? How many day-passes will be
sold per day to out-of-town guests?
Answer:
Demand curve for out of town visitors:
( )
Assignment 2 Dr. John Spry
Principles of Economic Analysis Spring 2013
Due: April 25
Total revenue from out of town visitors (TRO) = Po*QO = 60QO – 0.01QO
2
Marginal revenue from out of town visitors (MRO) = dTRO/dQO = 60 – 0.02QO
Marginal cost (MC) = 5
At the profit maximization, MRO = MC i.e.
60 – 0.02QO = 5, implies implies profit maximizing output sold to out of town visitors
(QO*) = 2750
And profit maximizing price for out of town visitors (PO*) = 60-0.01*2750= 32.5
c. (2 points) Explain why the relationship between the prices charged to locals versus the
prices charged to out of town visitors? Why does this happen?
Answer:
We can note that price charged to locals is less than price charged to out of town visitors.
This happens because demand is relatively inelastic for out of town visitors as compare to
locals. As a result, out of town visitors are ready to pay more than local visitors and
hence price charged to out of town visitors is greater than price charged to locals.
2. (15 points) Which of the following examples is an adverse-selection problem and
which is a moral hazard incentive problem? Explain why. In each case, give one method
that the firm might use to reduce the problem.
a. A Grand Forks restaurant wants to buy a used car for deliveries, but is afraid of buying a
lemon.
Answer:
This is a problem of adverse selection because the restaurant does not know the quality of
used car and hence it might end up buying lemon.
Solution: the restaurant can take help of some expert in identifying that which car is good
is quality and accordingly it can price the cars.
Assignment 2 Dr. John Spry
Principles of Economic Analysis Spring 2013
Due: April 25
. A bar decides to offer an all-you-can-drink promotion that is sold for a fixed price. The
ar discovers that the customers for this promotion are not its usual clientele. ...