Sheet1 QDPT CTR MRM C07010 002565127550601525755517501005019

Sheet1qdptctrmrmc07010002565127550601525755517501005019501254521251504

1880 Town is a tourist attraction in Midland, SD, featuring buildings built between 1880 and 1920, filled with antique furniture and collectibles, charging admission for tourists to experience history. Due to its uniqueness and location, 1880 Town holds some monopoly power. As a manager running a similar attraction, I have formulated a daily demand schedule for admission prices and volumes, and I closely monitor costs to make informed pricing decisions. This paper will analyze the demand schedule to determine total revenue, marginal revenue, total costs, marginal costs, optimal pricing and visitor volume, and estimate the attraction's profit.

Introduction

The tourism industry, especially attractions with historical or cultural significance, often operates in a market with certain monopolistic characteristics. In such settings, understanding the relationship between price, demand, costs, and revenue is crucial for maximizing profits. This analysis centers on a demand schedule provided for a hypothetical tourist attraction, akin to 1880 Town, with the goal of determining the optimal pricing strategy, expected visitor volume, and profitability. The approach involves calculating total and marginal revenues, total and marginal costs, and identifying the point at which profit is maximized.

Demand Schedule and Revenue Calculations

To analyze the attraction's economics, I employ the demand schedule, which lists various prices and corresponding quantities demanded. From this data, total revenue (TR) is calculated as the product of price (P) and quantity demanded (Q). Marginal revenue (MR) is derived from the change in total revenue when moving from one price-quantity point to the next, calculated as ΔTR / ΔQ. These calculations reveal how revenue changes as the attraction adjusts prices and expects different visitor volumes.

Demand Data and Total Revenue

Calculating Marginal Revenue

Marginal revenue is computed as the change in total revenue between successive points divided by the change in quantity:

• Between $10 and $8:
• ΔTR = $1,200 - $1,000 = $200
• ΔQ = 150 - 100 = 50
• MR = $200 / 50 = $4
• Between $8 and $6:
• ΔTR = $1,400 - $1,200 = $200
• ΔQ = 200 - 150 = 50
• MR = $200 / 50 = $4

Cost Analysis and Marginal Cost Calculation

In addition to revenue data, understanding costs is vital. Assume total costs (TC) for the attraction are given or estimated at different visitor levels. Using the provided total costs, marginal cost (MC) is calculated as the change in total cost divided by the change in quantity mislaid (ΔTC / ΔQ). This reveals how costs escalate with increasing visitor counts, informing pricing decisions.

Sample Cost Data and Marginal Costs

Determining Optimal Price and Visitor Volume

The goal is to identify the price and visitor volume combination that maximizes profit. Profit occurs where marginal revenue equals marginal cost (MR = MC). By analyzing the computed MR and MC values across the demand and cost data, the point where MR approximates MC indicates optimal pricing and expected number of visitors.

Analysis

At a price of $8 with a demand of approximately 150 visitors, the marginal revenue is about $4, matching the marginal cost of $10 at 150 visitors. While marginal revenue is lower than marginal cost at this level, other points might better approximate the optimal profit condition. When the marginal revenue aligns closest with marginal cost—say, at a price of $6 with 200 visitors—it's likely the optimum. Detailed calculations show that at a price of $6, demand is around 200 visitors, with marginal revenue roughly $4, and marginal cost close to that, indicating this is the profit-maximizing point.

Expected Profit Calculation

Profit is calculated as total revenue minus total costs (Profit = TR - TC) at the optimal quantity and price. Using the demand and cost estimates:

TR at 200 visitors and $6 per ticket: $6 × 200 = $1,200

TC at 200 visitors: $3,300

Profit: $1,200 - $3,300 = -$2,100

However, considering a different scenario at 150 visitors and $8 per ticket:

TR: $8 × 150 = $1,200

TC: $2,500

Profit: $1,200 - $2,500 = -$1,300

Similarly, at 250 visitors and $4 price, profit calculations suggest an even larger loss. Adjusting pricing to a point where total revenue covers total costs and yields positive profit is crucial. For instance, if total costs are minimized or costs are reduced, the optimal price may be higher with fewer visitors, or vice versa.

Conclusion

Based on the demand and cost data analyzed, the optimal price for the tourist attraction appears to be around $6 to $8, with an expected visitor volume of approximately 150 to 200 visitors. Specifically, setting the ticket price at $6 yields a demand of about 200 visitors, but with current cost estimates, profit remains negative. To truly maximize profit, operational efficiencies should be improved to lower costs, or the pricing strategy should be refined further. Ultimately, the goal is to find the price point where marginal revenue equals marginal cost, ensuring maximum profitability.

References

• Baumol, W. J., & Blinder, A. S. (2015). Economics: Principles and Policy. Cengage Learning.
• Krugman, P. R., & Wells, R. (2018). Microeconomics. Worth Publishers.
• Mankiw, N. G. (2021). Principles of Economics. Cengage.
• Perloff, J. M. (2017). Microeconomics. Pearson.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics. Pearson.
• Stiglitz, J. E., & Walsh, C. E. (2002). Economics. W. W. Norton & Company.
• Varian, H. R. (2010). Intermediate Microeconomics: A Modern Approach. W. W. Norton & Company.
• Friedman, M. (2017). Price Theory. Transaction Publishers.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics. McGraw-Hill Education.
• Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.