There are a total of 50 points available on this individual assignment. Be sure to clearly explain your answers and show your work to receive full credit. Late assignment opportunity cost: Deducts 3 points per day.
1. (10 points) Mayo Destination Water Park Center offers family fun year-round in the Northstar state to locals and out-of-state visitors to the nearby Mayo Center. The demand for day-passes to the water park for each market segment is independent of the other market segment. The marginal cost of providing service to each visitor is $5 per day. Suppose the daily demand curves for the two market segments are:
Locals:
Out of town:
a. (4 points) If Mayo Destination Water Park Center charges one price to locals, what is the profit maximizing price for locals? How many day-passes will be sold per day to locals?
b. (4 points) If Mayo Destination Water Park Center charges one price to out-of-towners, what is the profit maximizing price for out-of-town guests? How many day-passes will be sold per day to out-of-town guests?
c. (2 points) Explain why the relationship between the prices charged to locals versus the prices charged to out of town visitors? Why does this happen?
2. (15 points) Which of the following examples is an adverse-selection problem and which is a moral hazard incentive problem? Explain why. In each case, give one method that the firm might use to reduce the problem.
A Grand Forks restaurant wants to buy a used car for deliveries, but is afraid of buying a lemon.
A bar decides to offer an allyoucandrink promotion that is sold for a fixed price. The bar discovers that the customers for this promotion are not its usual clientele. Instead, the customers tend be politicians who consume an amazing amount of liquor. The bar loses money on the promotion.

A car wash owner hires a manager who promises to work long hours. When the owner is out of town, the manager goes home early. This action results in lost profits for…