2. As the new general manager of the Grand Palladium Jamaica luxury all-inclusive resort, you are re-assessing the pricing policies of your predecessor. According to the data you get, the marginal

cost of serving a guest is $600 (per day per room) and the elasticity of demand - obtained, presumably, by running pricing experiments, is 2.5 (or technically -2.5). Your predecessor opted to set price at $1,000 (per day per room). You quickly notice that at that price, the resort is only able to sell 80% of the rooms out of its 2,000-room capacity on a typical day. a. Evaluate the pricing policy of your predecessor. Could the price of $900 be optimal and if not, should you increase or decrease the price? b. Remembering the sense of belonging that you experienced in a crowded subway during the rush hour, you contemplate lowering the price so the resort is completely full. What is your back-of-the-envelope calculation for how much you need to lower the price? c. After some thought you cooled to the idea of full occupancy. Instead, you focused your energy and introduced a gift shop where vacationers can purchase tee shirts and other keepsakes. After some analysis, you learn that the average customer spends $60 in the gift shop (per room per day), and your margin on gift shop items is about 50%. In light of this, how should you change the price of a weekend stay at the Grand Palladium? (For the purposes of this question, assume that the demand is linear.)