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Unformatted text preview: In-Class Problems for Chapter 12Pricing And Advertisement1. As the owner of the only tennis club in an isolated wealthy community, you must decide on membership dues and fees for court time. There are two types of tennis players. Serious players have demand Q1 = 10 - P where Q1 is court hours per week and P is the fee per hour for each individual player. There are also occasional players with demand Q2 = 4 - (1/4)P. Assume that there are 1,000 players of each type. Because you have plenty of courts, the marginal cost of court time is zero. You have fixed costs of $10,000 per week. Serious and occasional players look alike, so you must charge them the same prices.a.Suppose that to maintain a professional atmosphere, you want to limit membership to serious players. How should you set the annual membership dues and court fees (assume 52 weeks per year) to maximize profits, keeping in mind the constraint that only serious players choose to join? What would profits be (per week)?In order to limit membership to serious players, the club owner should charge an entry fee, T, equal to the total consumer surplus of serious players. With individual demands of Q1 = 10 - P, individual consumer surplus is equal to:(0.5)(10 - 0)(10 - 0) = $50, or(50)(52) = $2600 per year.An entry fee of $2600 maximizes profits by capturing all consumer surplus. The profit-maximizing court fee is set to zero, because marginal cost is equal to zero. The entry fee of $2600 is higher than the occasional players are willing to pay (higher than their consumer surplus at a court fee of zero); therefore, this strategy will limit membership to the serious player. Weekly profits would be = (50)(1,000) - 10,000 = $40,000....
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- Spring '11