Purchase Solution

# Elasticity Consumer Surplus

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Suppose that the typical snowboarder/skiier visiting Mount Mogul ski resort on a typical day would be willing to pay for lifts up the mountain according to the following schedule. (see attched file)

a) Why does the WTP schedule slope downward ?

b) Suppose all skiers at Mount Mogul 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?

c) Is \$5/lift ride the per ride price which maximizes revenue? Explain , using the elasticity concept in your answer.

d) Show the area on the graph that would correspond to consumer's surplus earned by the typical snowboarder or skier with this payment scheme. Explain your answer briefly.

e) 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 Mogul.

##### Solution Preview

Suppose that the typical snowboarder /skiier visiting Mount Mogul ski resort on a typical day would be willing to pay for lifts up the mountain according to the following schedule.

a) Why does the WTP schedule slope downward ?

The WTP schedule slopes downward since the skier is willing to ride more rides if the price per ride is reduced. In this case, if the price is \$11, the skier will go only for a single ride whereas if the price is reduced all the way to \$1, the skier will go for 11 rides.

b) Suppose all skiers at Mount Mogul 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?

Let us first get the equation of the demand curve.
Let P be the price in \$s per ride and Q be the (quantity) or number of rides.
The equation for the line is P = mQ + c
Now, when Q=0, P = ...

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