Two-Part Tariffs
Pacific Studio is an amusement park. The marginal cost of providing each ride for a consumer is $2. After entering the park, each visitor's demand function for the number of rides is Q (p) = 40 - 4p, where p is the price for each ride.
a) Assume that according to the regulation, Pacific Studio is NOT allowed to charge any entry fee on the visitors. To maximize the profit, what should be the optimal price for each ride? How many rides would each visitor take? How much profit can Pacific Studio make from each typical visitor?
For parts (b) and (c): Assume that a change has been made in the regulation. The park is now allowed to charge an entry fee. (The park does not bear any cost to let visitors enter.)
b) To maximize the total profit from each visitor, how much entry fee should Pacific Studio charge on each visitor? How much should it charge for each ride? How many rides would each visitor take?
c) How much profit can the park make from each visitor in this case?
d) For the two pricing strategies you solved in part (a) and (b), which one leads to a Pareto efficient market equilibrium?