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 …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 ski-resort owner eliminates the possibility of buying single ride lift tickets and instead sells only an all-day 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
1) obvious -- the lower the price the more a person will buy.
2) The equation for WTP is P=12-Q. 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.
I apologize, but I am unable to view or access external URLs or images. However, I can still provide explanations based on the information you have given me.
1. The willingness to pay (WTP) schedule for lifts typically slopes downward because, in general, people are willing to pay less for additional units of a good or service. As consumers, we tend to place higher value on the first unit of a good or service and gradually decrease our valuation for each additional unit. This is known as the law of diminishing marginal utility.
2. To calculate the elasticity of demand at a specific price, you need the formula:
Elasticity of Demand = (% change in quantity demanded) / (% change in price)
Since we do not have the specific percentage changes in quantity demanded and price, it is not possible to determine the elasticity of demand in this case. However, if you have the initial quantity demanded and the corresponding quantity demanded at a different price, you can calculate the percentage change and use it to calculate the elasticity of demand.
3. To determine the price that maximizes revenue, you need to consider the concept of price elasticity of demand. Price elasticity of demand measures the responsiveness of quantity demanded to a change in price. If demand is elastic (elasticity > 1), decreasing the price will increase total revenue. However, if demand is inelastic (elasticity < 1), increasing the price will increase total revenue.
To find the price that maximizes revenue, you would need to determine the price elasticity of demand at different price levels. If the elasticity is greater than 1, lowering the price would be beneficial for maximizing revenue. However, if the elasticity is less than 1, increasing the price would be beneficial. Without specific information on the elasticity at different price levels, it is not possible to determine if $5/lift ride maximizes revenue.
4. Consumer surplus represents the economic benefit that consumers receive when they are willing to pay more for a good or service than the market price. In this case, the area on the graph that corresponds to consumer surplus would be the portion between the WTP schedule and the price charged for the lift ride. The larger the area of consumer surplus, the greater the benefit consumers receive.
Without being able to see the graph you mentioned, I cannot provide a more specific answer regarding the area of consumer surplus.
5. To determine the maximum price that could be charged without discouraging the skier from coming to Mount Unknown, you would need to consider the skier's willingness to pay for an all-day lift pass. If the skier's willingness to pay for an all-day pass is higher than the price charged, they will be willing to purchase it. However, if the price exceeds their willingness to pay, they may be discouraged from coming.
Without specific information on the skier's willingness to pay, it is not possible to determine the maximum price that could be charged for an all-day lift pass without discouraging the skier.