The marketing department has extensively researched the habits of visitors to the Park Theme Park. Our
customers are between the ages of 15 and 30, mostly from middle income to upper middle income
brackets. The theme park has 10 individual attractions that visitors can enjoy.
In our survey, we gathered daily demand data for the individual attractions for a typical customer who
frequents the theme park. I'll send you a spreadsheet with the customer demand data. Note that the price
(P) column gives the various prices that could be charged for each of the 10 individual attractions. The
quantity (Q) column provides the number of attractions the customer would visit at these prices.
For example, if the price is set at $4, the typical customer would visit 5 attractions. This could mean that
the customer visits 5 different attractions once or visits the same attraction five times. Because it is
possible to go to the same attraction multiple times, the actual number of possible visits exceeds the
number of attractions. That is why, at a price of $2.95, the number of attractions visited is 12, which is
larger than the actual number of attractions at the park.
A visitor generally comes to the Park Theme Park for the whole day. Because the typical visitor spends
about 30 to 35 minutes at each attraction, the maximum number of purchases by a customer is unlikely to
exceed 16 on any given day.
Park Theme Park's cost structure suggests that most of the park's costs are fixed. However, variable costs
are associated with each attraction. Variable costs are mostly linked to ticketing, controlling entrance and
exit to the individual attractions, and keeping the facilities clean and attractive as the number of visitors
increases.
The operations department tracks cost data for each attraction. Although the total variable cost increases
as the number of customers increases, the average variable cost, or variable cost per customer, has
remained relatively constant at $2.80 per customer for each attraction. The marginal cost, or the cost of
one more visitor to an attraction, is also $2.80.
As has been the practice since the theme park opened, there is no charge to enter the park. However,
each attraction is individually priced. Currently, the charge for an individual attraction is $3.70 per visitor.
This charge may sound low, but given the cost structure of Park, the marketing department believes this
price is appropriate and that it maximizes profits for the theme park. At a price of $3.70 per attraction, the
typical customer will visit seven attractions and spend $25.90.
I hope this information is useful.
Demand Data for Park
Q
0
1
2
3
4
5
6
7
8
9
10
P
$4.75
$4.60
$4.45
$4.30
$4.15
$4.00
$3.85
$3.70
$3.55
$3.40
$3.25
TR
$0.00
$4.60
$8.90
$12.90
$16.60
$20.00
$23.10
$25.90
$28.40
$30.60
$32.50
MC
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
MR
$4.60
$4.30
$4.00
$3.70
$3.40
$3.10
$2.80
$2.50
$2.20
$1.90
1
11
12
13
14
15
16
$3.10
$2.95
$2.80
$2.65
$2.50
$2.35
$34.10
$35.40
$36.40
$37.10
$37.50
$37.60
$2.80
$2.80
$2.80
$2.80
$2.80
$2.80
$1.60
$1.30
$1.00
$0.70
$0.40
$0.10
Director of Marketing, Park
I think we all agree on two things: We're the only theme park within a 50-mile radius, and our
attractions are different from attractions in other theme parks. Park is a business with pricing power,
and we use that power effectively.
Current pricing practices at Park are no different than those at other firms with pricing power. The
basic pricing rule says that profit-maximizing firms should set price in a way that marginal revenue
equals marginal cost. Since our marginal cost is $2.80 per customer, we should try to induce a typical
customer to visit the number of attractions necessary to make marginal revenue equal to $2.80 also.
The price per attraction should be consistent with this outcome, so we should charge $3.70. At this
price, market research shows our typical customer will visit seven attractions. Revenue collected per
customer will be $3.70 times seven, which is $25.90, and given our cost structure, this revenue will
maximize profits.
Frankly, I don't see anything wrong with our pricing strategy. I recommend that current practices be
continued without change.
CEO, Park
I've reviewed the market research, and I agree with Jim—up to a point. Yes, the price per attraction
should be set so that marginal revenue equals marginal cost. So the price of $3.70 is correct and
should be continued. But there are alternatives that would give us larger revenues and profits.
I am thinking of the two-part pricing strategy that's practiced by golf clubs, telephone companies, and
car-rental agencies. These businesses charge their clients a fixed fee, which gives them the right to
use the products. Then the businesses charge their clients another fee based on actual usage. Rental
car companies charge a fixed daily rate and a mileage fee on top of that. Telephone companies
charge a fixed monthly fee and a per-minute calling charge. Why don't we adopt a similar pricing
strategy?
If we accept Jim's recommendation and charge $3.70, we are giving our customers a substantial
break. Look at our estimated demand data for the theme park attractions.
Suppose our typical customer could go to only one attraction: the customer would be willing to pay
$4.60. By charging $3.70, Park is leaving a surplus of 90 cents—almost a dollar in potential added
revenue. We're leaving money on the table! Instead, we should try to capture the surplus by charging a
fixed fee to enter the park.
I don't think an appropriate entrance fee will affect demand because the fee will equal what customers
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are willing to pay over and above the $3.70 per attraction. We just have to figure out the exact fixed
entrance fee. I recommend an alternative pricing strategy that includes a fixed entrance fee and a
price of $3.70 for each attraction.
Vice President
I'm inclined to side with Bob. We should consider the idea of a fixed entrance fee in addition to a
charge for each attraction. I'm not sure we should stick to the $3.70 price, though. It seems to me that
there are certain tradeoffs involved. Perhaps we could reduce the price per attraction below $3.70 but
in exchange increase the fixed entrance fee.
Suppose I take Bob's argument one step further and suggest we drop the price for an individual
attraction to $3.10. Looking at our estimated demand data, the surplus generated for the typical
customer who visits one attraction is equal to $4.60 minus $3.10, which is $1.50. This surplus is larger
than the surplus if the price were left at $3.70. Let's say we drop the price per attraction and offset the
lost revenue by charging a larger entrance fee to the park.
By dropping the price per attraction to $3.10, we increase the number of attractions visited to 11, which
increases revenue. And because the price per attraction is still larger than the marginal cost, profits
should also increase.
I favor taking a serious look at Bob's suggested approach. We need to determine the optimal fixed
entrance fee and price per attraction. This should tell us if our current pricing practice should be
continued.
Customer Demand for resort Packages
The marketing department has extensively researched the habits of Resort customers.
We will send you a spreadsheet that contains demand data on consumer maximum willingness to pay
(reservation prices) for two sets of packages:
(1) Bundles at Park for golf, luxury, and family options.
(2) The Big Apple Platinum package.
assessment

Assessment of whether parks current pricing strategy is profit-maximizing.
The parks current maximizing strategy is not maximizing profits despite the MC= MR
at $3.70, currently price per visitor, per attraction. The objective is to maximize
quantity and profits. Estimating the demand for the product (attraction), shows a
shift to the left when the prices are increased. See graphs and table below.
P=price Q=Quantity
3
P
$4.75
$4.60
$4.45
$4.30
$4.15
$4.00
$3.85
$3.70
$3.55
$3.40
$3.25
$3.10
$2.95
$2.80
$2.65
$2.50
$2.35
Q
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
0
5
10
0
5
10
15
20
$5.00
$4.50
$4.00
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
15
20
We know that the firm’s profit is maximized when the marginal cost is equal to
marginal revenue. Also, the level of marginal revenue depends largely upon the
competitiveness of the product market.
In the EXCEL demand data file, we find that MC = MR= 2.80 when Q = 7 and P =
$3.70.
Therefore, the current pricing strategy does maximize the firm’s profit.

Analyze the revenue and profit implications for the alternative pricing
strategies proposed by the CEO, DOM, and VP
See summary of pricing strategy proposals below in table
Proposal
CEO
DOM
VP
features
$ cost
Q
TR $
3.70 +
fix fee
entrance
7
>25.90
3.70
3.10 + fix 
fee entrance
7
25.90
11
34.10
4
Recommendation
Two-part
MR=MC
Alternative
Q= attractions
The two-part tariff is a pricing strategy that firms with market power use to increase
their revenues and profits. The term "two-part tariff" refers to the two fees that are
charged to consumers under this strategy. The first tariff is a fixed fee that gives
them the right to purchase units of a product or a service. The second tariff is a perunit charge based on the actual rate of usage or purchase of the good.
The CEO and VP recommendations increase revenues. Profits??????
(See the following point first.)
Under Bob’s proposal, the total revenue = 4.60+3.70*6 = 26.80, but profit is
increased by the difference in the price of the first ticket. That is, the profit is
increased by 7.2 – 6.30 = $0.90. The consumer’s surplus for the first attraction is
zero because price is exactly $4.60, but the following 5 attractions will be positive
and sum up to 2.25, which is smaller than the current situation. (This means the
consumers become worse off.)
Under Nell’s idea, the total revenue = 4.60+3.10*10 = 35.60, but profit is brought
down to 4.80. That is, the profit is decreased by 6.30 – 4.80 = $1.50
The consumer’s surplus for the first attraction is also zero, but the following 10
attractions will be positive and sum up to 6.75 if the price is set at $3.10, which is
larger than the current situation. (This means the consumers become better off.)

Discuss how Park's current and proposed pricing strategies affect consumer
surplus.
According to The CEO, increasing he price from 3.70 to 4.60 will create a surplus oF
90¢ DOM recommendations does not add any surplus VP recommendation, creates a
larger surplus with 3.10, from 4.60, ha captures the difference with a higher
entrance fee.
 Recommend an optimal pricing strategy at Park. Your proposal should specify
the exact prices that should be charged to visitors and demonstrate that
these prices will produce the maximum level of profits for Park.
I would offer different options to maximized profit
OPTIONS
Price $
Attractions
I
4.00
5
TR
20.00
Comments
Average
customer
purchase
II
3.70
7
25.90
MC=MR
III
3.25
10
32.50 + fix
MC> MR
entrance fee = Will capture
9.00
the difference
I think the options will capture all the customers and maximized profits.
Consumer demand is a measure of willingness to pay.
demand curve is estimated as: P = -0.15Q + 4.75
Consumers often value each additional unit consumed less that previous units (i.e.,
the concept of diminishing marginal utility). Based on the data in the given table,
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the consumer would be willing to pay $2.80 for the first 13 attractions. Each
successive attraction has a value to the consumer of $0.15 less than previous units as
needs are met and the consumer engages in playing more for pleasure.
Consumers do have a choice in the purchase of goods. Either they could avoid
market participation and spend nothing and receive nothing of value or they can
purchase a certain quantity of this good and receive value over-and-above the
market price. Consumer surplus represents the reward to consumers for
participating in the market place.
P = -0.15Q + 4.75
Demand
$5.00
$4.50
$4.00
Price
$3.50
$3.00
$2.50
$2.00
$1.50
$1.00
$0.50
$0.00
0
5
10
15
20
Quantity
Consumer Surplus measures the difference between what is person is willing to pay
for a commodity and the amount he/she actually is required to pay.
At the current price $3.70, the consumer surplus is equal to the sum of the amount
that the consumers saved OVER the price. (please refer to EXCEL, surplus 0
column) so the total surplus is 3.15 if the consumer bought 7 attractions.
It is not decided by your question exactly how much should be charged in the
proposed two-part pricing strategies. Still, we can compare both strategies.
Since Bob’s strategy yields the highest profit, his proposal could be adopted.
Therefore, the firm can charge 4.60 for the first entry and 3.70 for the rest. In this
way, the profit is maximized to 7.20 per customer.

Analyze Resort's current practice of bundling the golf option with the luxury
option. Recommend an optimal bundling strategy for the golf, luxury, and
family options. Discuss profits under each alternative.
From the demand curve bundling of family and golf packages make no sense.
Families are least likely to pay for a golf package add on and viceversa. The luxury
options and the golf pacjkage go in synchrony. Customers are most likely and willing
to use both simultaneously. Profits will increase with a family only option, and with a
golf luxury bundle package.
6
When Blue Jet charges separate prices to their consumers, we need to find the
demand curve for the separate options of golf, luxury and family. By resorting and
plotting, we create the following demand curves for these items individually.
Demand
$600.00
$500.00
$400.00
$300.00
$200.00
$100.00
97
100
94
91
88
85
82
79
76
73
70
67
64
61
58
55
52
49
46
43
40
37
34
31
28
25
22
19
16
13
7
10
4
1
$0.00
-$100.00
-$200.00
golf
Family
luxury
Although we know that the first order condition for profit-maximization is marginal
revenue equals marginal cost, there is no information available about the cost of
these items. So we have to assume similar marginal cost for all of them as they are
almost the same services. Obviously, the package with the highest demand curve will
provide the largest revenue, given the same marginal cost. (this means that for a
given price, people are willing to consume more of this item.) Therefore, the family
option will yield the highest profit.
However, in some cases, bundling may provide significant economies in the joint
sale of the products as a bundle. Such economies may be in packaging or alleviation
of information and search costs through the sale of "matching" components in a
bundle. In other cases bundling may prevent problems of adverse selection. Often
bundling is used as an instrument of price discrimination. The traditional theory of
price discrimination is based on the assumption of monopoly.
In pure bundling, the individual goods are not sold separately but are sold only in
combination. In mixed bundling the individual goods, as well as the package, are
available.
First, if there’s pure bundling, from the figure “Reservation Prices: Family vs.
Golf”, we find that family and golf are substitutes for each other and an increase in
the price of one item will increase the consumption of the other. Therefore, there is
always a trade off between sales of one and the other, and the pure bundling of these
two items doesn’t increase the firm’s profitability.
Under this condition, when there’s mixed bundling, consumers will definitely choose
the individual consumptions of golf OR family, but never the combination of them
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both. Therefore, any type of bundling of golf and family will not significantly
increase the firm’s profit.
Then we turn to the figure “Reservation Prices: luxury vs. Golf”, which shows
positive relationship between these two options. This means that they are
complements to each other, and a person spends more on golf is willing to pay more
for a luxury. (this is no surprising because these two options are actually the similar
service with different “quality”) Therefore, there is no trade off between sales of one
and the other, and the pure bundling of these two items might probably increase the
firm’s profitability. (again, since we don’t have information on the cost, we cannot
calculate how is the profit increased.)
Under this condition, when there’s mixed bundling, consumers will choose the
bundle and individual options as well. And the total revenue depends largely upon
the bundle price and individuals. However, the bundled price takes advantage of the
consumer surplus over the individual price and therefore, as the two items are
complements. The bundling might also increase the firm’s profit.

Evaluate Resort's bundling options for a Platinum package. Discuss profits for
each possible option: separate prices, mixed bundling, and pure bundling.
Recommend a Platinum package pricing strategy.
Dining Event
$50
$300
$300
$50
$150
$275
$225
$200
TR
$350
$350
$425
$425
Customer
Type
A
B
C
D
Customers C, and D will generate the higher profits. It seems the wealthiest
customers will welcome the dining event bundle at higher prices. Leaving two other
separate prices will capture the customers that will do either of them.
In the Big Apple Platinum package pricing strategy, we have to assume that the four
types of customers are of the same share in the market, otherwise, no comparison
can be made.
Since the firm is going to maximize profit by enlarging its sales and total revenue,
given specific cost. So obviously firm should aim at the type C and D customers as
their combined reservation price for the package are the highest. (both types are
willing to pay $425 for the package) I think this question asks about pure bundling
strategy only, and only one option is available for all consumers: Event + dining.
Therefore, the firm could charge a price as high as $425, assuming the combined
cost of event and dining is greater than $350. Then type C and D customers will buy
the Big Apple Platinum package.
On the other hand, if the combined cost is lower than $350, the firm will charge
$350 and take over the whole market share, assuming no other competitors.
8