The graph below illustrates the demand for rooms at The Open Arms Hotel. It show

Question

The graph below illustrates the demand for rooms at The Open Arms Hotel. It shows the total demand for rooms as well as the demand in both market segments, A and B. All rooms in the hotel are identical. The graph also shows the corresponding marginal revenue curves and marginal cost, which is $40 per room

6.5 Suppose that the management of The Open Arms Hotel pursues its price-discrimination strategy rather than charge a uniform price for all rooms rented. This policy will result in renting more rooms in one segment and fewer in the other. Which of the following room reallocations will occur?

A. 40 from B and 40 to A

B. 20 from A and 40 to B

C. 20 from A and 20 to B

D. 40 from B and 20 to A

Explanation / Answer

Just answered this question on your other post haha. Here is what I said: 1. (note this question was on your first post only) Ok so from the graph I can see that the first answer is A for several reasons. First, answers D and C are not price discriminating and therfore must be wrong based on the question. Answers B and C must be wrong because both of them have zero profit in B (I think it's fair to assume that this is not profit maximizing). There are several ways to do this mathematically, but I think the simplest way is to find the total profit area for each answer choice by doing height*base + height*base. In choice A, this is going to be [(100-40)*30] + [(160-40)*40] = 76800 2. For this one just use common sence, all the rooms have the same MC and the demand for rooms in the B market is much higher and therefore prices are higher. If you had to choose which market to sell in you would choose B because you can make more money. So basically, choice B has the most reallocations to market B so it must be the correct answer.

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