Question

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

Answer 1

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.