The Acme Bakery in the seaside resort town of Malvino sells freshly baked bread to two categories of consumers: residents of the town and tourists. The weekly demand from tourists is given by the demand function:
for prices P between $0 and $5. (There is no demand at prices above $5 per loaf.) The weekly demand from local residents is:
for prices P between $0 and $3. (There is no demand from locals at prices above $3 per loaf.) The bakery's marginal cost is constant at $1.20 per loaf.
1. Suppose the Acme Bakery could somehow set different prices for locals and for tourists. a) What prices would it set for each group? b) What contribution margin would it earn from the two groups?
2. a) If Acme had to charge the same price to both locals and tourists, what price would it set? Explain and show. b) What would be the associated contribution margin?Explain
3. The Acme Bakery has come to the Malvino Town Council with a request for a zoning variance that will permit it to sell bread at a new outlet located in the residential district of town. This will permit it to sell bread at the optimal price for tourists at its store on Main Street and sell bread at the optimal price for locals in this new outlet. The geography of the town is such that no tourist could buy bread at the store intended for locals (assume they would be unable to find it, and locals will not tell them about it). Also assume thatno local would buy from the Main Street location unless the price is lower than that charged at the new outlet. Acme's argument in favor of the requested variance is that it would promote the profits of local industry. As a member of the Town Council, you are concerned about the profits of the bakery - it makes generous contributions to your reelection campaign - but you also need votes, and so you are very concerned with the welfare of local customers. Should you favor this zoning variance? Explain and justify.