Posted by Dave on Monday, June 29, 2009 at 1:14pm.
Suppose that the typical snowboarder/skier visiting Mount Unknown ski resort on a typical day would be willing to pay for lifts up the mountain according to the following schedule. (see graph â€¦url below)
1. Why does the WTP schedule slope downward ?
2. Suppose all skiers at Mount Unknown had the same WTP schedule as this skier and the resort operator charged $5 per ride up the lift. What is the elasticity of demand at this price?
3. Is $5/lift ride the per ride price which maximizes revenue? Explain , using the elasticity concept in your answer.
4. Show the area on the graph that would correspond to consumer's surplus earned by the typical boarder/skier with this payment scheme. Explain your answer briefly.
5. If the skiresort owner eliminates the possibility of buying single ride lift tickets and instead sells only an allday lift pass, entitling the skier/boarder to as many trips up the mountain as desired, what is the maximum price that could be charged without discouraging the skier from coming to Mount Unknown.
Graph : tinypic . com/r/2la787p/5

economics  economyst, Monday, June 29, 2009 at 1:58pm
1) obvious  the lower the price the more a person will buy.
2) The equation for WTP is P=12Q. If P=5 then Q=7. Elasticity is (%change in Q)/(%change in P). So change P by a small percent  say 1%. What is the implied percentage change in Q. I get slightly more than 1%, ergo a slightly elastic demand.
3) hint. Max revenue is at P=6
4) consumer surplus is the area above price but below the WTP line.
5) Set a price that grabs all of the skiers consumer surplus (calculated at a zero price). Hint: the entire area under the WTP line.
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