e) The owners are considering whether to set prices so that only the white-collar fans will buy tickets.What is their profit if they decide to cater to only the white-collar fans?f) Comparing profit from (d) and profit from (e), determine the pricing policy that the owners will set.How does their profit achieved from this policy compare with the case of full information earned in (a).g) What is the "cost of coping with the information asymmetry in part (f)? Who bears the cost? Why? Cheapskates is a very minor-league professional hockey team. Its facilities are large enough toaccommodate all of the 1,000 fans who might want to watch its home games. It can provide two typesof seats-ordinary and luxury. There are also two sorts of fans: 60% of the fans are blue-collar fans andthe rest are white-collar fans. The cost of providing each type of seat and the fans willingness to payfor each type of seat are given in the following table (measured in dollars):Seat TypeOrdinaryLuxuryCost48Willingness to PayBlue-Collar1215White-Collar1422Each fan will buy at most one seat, depending on the consumer surplus he would get (maximumwillingness to pay minus the actual price paid) from the two kinds. If the surplus for both is negative,then he won't buy any. If at least one kind gives him nonnegative surplus, then he will buy the kindthat gives him the larger surplus. If the two kinds give him equal, nonnegative surplus, then the blue-collar fan will buy the luxury kind.The team owners provide and price their seating to maximize profit measured in thousands of dollarsper game. They set prices for each kind of seat, sell as many tickets as are demanded at these prices,and then provide the numbers and types of seats of each kind for which the tickets have sold.a) First, suppose the team owners can identify the type of each individual fan who arrives at the ticketwindow (presumably by the color of his collar) and can offer him just one type of seat at a stated price,on a take-it-or-leave-it basis. What is the owners' maximum profit under this system?b) Now, suppose the team owners cannot identify any individual fan, but they still know the proportionof blue-collar fans. Let the price of an ordinary seat be X and the price of a luxury seat be Y. What arethe incentive-compatibility constraints that will ensure that the blue-collar fans buy the ordinary seatsand the white-collar fans buy the luxury seats? Graph these constraints on an X-Y coordinate's plane.c) What are the participation constraints for the fans' decisions on whether to buy tickets at all? Addthese constraints to the graph in part (b).d) Given the constraints in parts (b) and (c), what prices X and Y maximize the owners' profit under thisprice system? What is the profit?e) The owners are considering whether to set prices so that only the white-collar fans will buy tickets.What is their profit if they decide to cater to only the white-collar fans?

Total Number of fans = 1000 Proportion of blue collar fans = 60% Number of blue collar fans = 600 Proportion of white collar fans = 40% Number of White collar fans = 400 Tickets are bought based on the consumer surplus derived by doing it . Cost and willingness to pay for each type of seat by each type of fan is - a ) If the seller can identify the type of fans and wants to offer only single ticket , then - Maximum he can charge is willingness to pay of fans , So, Revenue from selling ordinary tickets to blue collar = 12*600 = 7200 Revenue from selling ordinary tickets to white collar = 14*400 = 5600 Revenue from selling luxury tickets to blue collar = 15*600 = 9000 Revenue from selling ordinary tickets to White collar = 8800 So , additional revenue earned if blue collar fans are offered ordinary tickets = 7200 - 5600 = 1600 additional revenue earned if blue collar fans are offered luxury tickets = 9000- 8800 = 200 We can see when blue collar fans are provided ordinary ticket additional revenue is relatively more compared to luxury tickets . Therefore , seller would offer ordinary tickets to blue collar fans and luxury ticket to white collar fans . So , 600 ordinary and 400 luxury ticket are sold . b ) We know that seller wants to sell ordinary tickets to blue collar fans and luxury tickets to remaining white collar fans but he cannot differentiate between the two . So now to make this possible he will price both tickets in such a manner that it provides better surplus to buy luxury tickets for white collars and similar for blue collar . Also keeping in mind to maximize profits . Incentive Compatibility constraints - Price of ordinary ticket : X , Price of luxury ticket : Y X = 12 & Y = 19 (Will be the optimal pricing ) Because , For Blue collar individual - Only ordinary ticket would be bought as Y is greater than there willingness to pay . Consumer Surplus in ordinary tickets= 12 -12 = 0 For White Collar - They can buy both if they wish to but , CS of ordinary ticket = 14 - 12 = 2 CS of luxury ticket = 22 - 19 = 3 So , he will only buy luxury ticket as per the condition provided in the question .

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Cheapskates is a very minor-league professional hockey team. Its facilities are large enough to accommodate all of the 1,000 fans who might want to watch its home games. It can provide two types of seats-ordinary and luxury. There are also two sorts of fans: 60% of the fans are blue-collar fans and the rest are white-collar fans. The cost of providing each type of seat and the fans willingness to pay for each type of seat are given in the following table (measured in dollars): Cost Willingness to Pay

Cheapskates is a very minor-league professional hockey team. Its facilities are large enough to accommodate all of the 1,000 fans who might want to watch its home games. It can provide two types of seats-ordinary and luxury. There are also two sorts of fans: 60% of the fans are blue-collar fans and the rest are white-collar fans. The cost of providing each type of seat and the fans willingness to pay for each type of seat are given in the following table (measured in dollars): Cost Willingness to Pay

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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