The Homework of the Economics

The Homework of the Economics Part 1 Businesses can utilize different pricing strategies to sell their products or services. Before deciding on the most efficient design that will maximize profits and business sustainability, the management should assess its position to understand its pricing segment and capability. Also, the administration should evaluate their strategy towards the pricing reaction of its competitors. This report will determine Hotel del Luna; when it charges the same price per night for each guest and when it charges a different cost per night for local guests and out-of-town guests.

For Hotel del Luna, charging each guest the same price per night will help the firm overcome price competition problems; thus, this can increase its profits since more customers may start coming to the hotel. Also, by charging uniform prices, the other firms will begin setting uniform prices to ensure firms' enhanced profits. Thus, uniform pricing is crucial for the long-term profitability of Hotel del Luna.

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ECONOMICS2 Charging the local guests and out-of-town guests a different price per night by Hotel del Luna will increase its profits by ensuring it extracts maximum consumer surplus. The hotel will also benefit from charging varying fees to these groups by harming the competition at their supplier’s level; hence, boosting their market power. Hotel del Luna can spread out the demand for its services through this strategy, thereby clearing congestion at its premises. Without price discrimination, there are some services that the hotel may not provide since they would result in losses. However, price discrimination enables the hotel to offer a range of services with increased profits; hence, it can increase its investments within a short duration.

Part 2 From the hotel’s internal study, the market demand for a room is Q = 350 – (5/6) P. When Hotel del Luna charges the same price for its customers if the cost per room, P, is $100, the number of units that will be occupied in one night will be; Q = 350 – (5/6) P Q = 350 – (5/6) 100 Q = 266 rooms Total income for the night = 266 x $100 = $26600 Thus, profit = $26600 - $7860 = $18740 However, the market demand under price discrimination, from the internal study, will be Q = 200 – 0.5 P for local guests, and Q = 150 – (1/3) P for the out-of-town guests. If the hotel charges $100 for local guests and $150 for out-of-town guests, the market demand will be; Local guests: Q = 200 – 0.5*100 = 150 rooms Out-of-town guests: Q = 150 – (1/3) *150 = 100 rooms Total income for a night = ($150 x 100) + ($100 x 150) = $30000

ECONOMICS3 Thus, profit = $30000 - $7860 = $22140

Part 3 From the market demand calculation results, Hotel del Luna's operating costs stand at $7860 per night. If it were charging the hotel guests the same price per night, it would result in lower-income than the hotel's revenue when it demands a different fee for local guests and outof-town guests. Thus, price discrimination will enable the hotel to earn extra income.

Despite the total number of guests that will come to the hotel under price discrimination being lower, the calculations indicate that Hotel del Luna will reap more profits than when it is using uniform pricing. The diagrams also show that price discrimination minimizes deadweight loss and consumer surplus while enhancing the producer surplus and opportunity costs. Thus, Hotel del Luna will experience an efficient outcome when charging a different price for local and out-of-town guests by maximizing its surplus.

Part 4 I would recommend that Hotel del Luna utilize the price discrimination strategy to charge a different price for its local and out-of-town guests and a peak load pricing strategy. Every business has its peak and off-peak hours; hence, the hotel should take advantage of this to further

ECONOMICS4 maximize its revenue. When the rooms' demand is higher, the consumers who come to the hotel should pay more, while those who come when demand is low can pay lower, but not below the marked price.

Peak load pricing will enable Hotel del Luna to increase its profitability. Through this, the hotel can comfortably settle specific bills such as electricity, thereby realizing more profits.

The management can also focus on matching the market demand with its capacity since the higher prices during peak hours will ensure less congestion in the hotel. Thus, incorporating both the price discrimination and peak-load pricing strategies, Hotel del Luna will ensure maximum profitability and efficiency in its service production.