Management of AG Travel and Tour has identified two groups of individuals that would be interested in the vacation package consisting of room and board and/or entertainment. The maximum amount that group 1 is willing to pay for room and board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximum amount they are willing to pay for room and board is GHC 1800 and for entertainment is GHC 750. Although AG Travel and Tour is not able to identify members of either group, it does know that each group values the components of the package differently. Assuming there are an equal number of members in each group and that the total membership in each group is a single individual. If the marginal cost of providing the service (room and board and/or entertainment) to each group is GHC 1000. i. How much will the hotel charge members of each group for the vacation package if it could identify the members in each group? (5 marks) ii. How much will the profit for AG Travel and Tour be? iii. Since AG Travel and Tour is not able to identify members of each group, what price should it charge for each product? (3 marks) iv. What will be the profit for AG Travel and Tour in the case of (iii) above? v. If AG Travel and Tour wants to charge a package price, what is the highest price it can charge? vi. What profit will AG Travel and Tour make if it charges the package price found in (v) above?
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gideonbuluse
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Management of AG Travel and Tour has identified two groups of individuals that
would be interested in the vacation package consisting of room and board and/or
entertainment. The maximum amount that group 1 is willing to pay for room and
board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximum
amount they are willing to pay for room and board is GHC 1800 and for
entertainment is GHC 750. Although AG Travel and Tour is not able to identify
members of either group, it does know that each group values the components of
the package differently. Assuming there are an equal number of members in each
group and that the total membership in each group is a single individual. If the
marginal cost of providing the service (room and board and/or entertainment) to
each group is GHC 1000.
i. How much will the hotel charge members of each group for the vacation
package if it could identify the members in each group? (5 marks)
ii. How much will the profit for AG Travel and Tour be? (2 marks)
iii. Since AG Travel and Tour is not able to identify members of each group,
what price should it charge for each product? (3 marks)
iv. What will be the profit for AG Travel and Tour in the case of (iii) above?
(3 marks)
v. If AG Travel and Tour wants to charge a package price, what is the highest
price it can charge? (4 marks)
vi. What profit will AG Travel and Tour make if it charges the package price
found in (v) above?
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Explanation:
Management of AG Travel and Tour has identified two groups of individuals that
would be interested in the vacation package consisting of room and board and/or
entertainment. The maximum amount that group 1 is willing to pay for room and
board is GHC 2500 and for entertainment is GHC 500. For group 2, the maximum
amount they are willing to pay for room and board is GHC 1800 and for
entertainment is GHC 750. Although AG Travel and Tour is not able to identify
members of either group, it does know that each group values the components of
the package differently. Assuming there are an equal number of members in each
group and that the total membership in each group is a single individual. If the
marginal cost of providing the service (room and board and/or entertainment) to
each group is GHC 1000.
i. How much will the hotel charge members of each group for the vacation
package if it could identify the members in each group? (5 marks)
ii. How much will the profit for AG Travel and Tour be? (2 marks)
iii. Since AG Travel and Tour is not able to identify members of each group,
Marginal revenue (MR) is the revenue amount one can gain from selling 1 additional unit. Marginal cost (MC) is the cost of selling 1 more unit
Explanation:
Given, MC of offering the services to each group is "GHC 1000". Group 1 is ready to pay maximum of GHC 3000 & group 2 is ready to pay a maximum of GHC 2550.
(i) If AG Travel and Tour can identify the "members of each group", it would" charge the maximum price" which each group is willing to pay. They can charge "different prices" for each group/they could charge "GHC 2550" which is "payable by both groups".
ii. If AG Travel and Tour charge GHC "2550" for "both groups" the total revenue would be GHC 5100 (2550*2). MC of the firm would be GHC 2000 (1000*2). Therefore, profit would be GHC 3100 (GHC 5100- GHC 2000). If it charges Rs 3000, for both groups the total revenue would be 3000*2 = 6000. MC of AG travel and Tour would be GHC 2000(1000*2) . Hence, profit would be GHC 4000 (GHC 6000-GHC 2000)
iii. Since AG Travel and Tour is not able to identify the members, it will charge atleast GHC 1000 that is equal to its MC (break even), to each group. Any amount over and above GHC 1000 will be profit.
(iv) AG Travel and Tour will consider Rs 2550 as the price since of the two groups the maximum that one group is willing to pay is Rs 2550. Which means that atleast Rs 2550 can be charged from the groups. If AG Travel and Tour takes the highest price as Rs 3000, there are chances that the group which can pay a maximum of Rs 2550 would not take the packages which will be a loss for the AG Travel and Tour. Hence the highest price that AG Travel and Tour can charge is Rs 2550.
(v) The profit in the above case (iv) will be GHC 1000*2 = 2000, which MC and GHC 2550*2 = 5100 , therefore profit will be GHC 5100- GHC 2000= 3100 Rs
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