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You are the sole proprietor of Malibu Surf Shop (MSS), which rents windsurfing boards to tourists. The marginal cost of providing a board rental for the day is $30.00. MSS has daily total fixed costs of $5,000, comprising property rental rates in Malibu, the opportunity cost of your inventory, and the opportunity cost of your time and savings that you have plowed into the business. The daily demand curve facing MSS is
P = 240- 0.10*Q
where P is the daily rental rate per board, and Q is the number of board rentals demanded per day.
a. (4 points) What is the profit maximizing board rental rate (P)? How many boards will MSS rent per day (Q)?
b. (4 points) What are MSS’s daily total profits?
c. (4 points) Regulations have increased the board rental marginal cost to $40.00 per day due to a fee per windsurfing board rented that the City of Malibu imposed on the dozens of surf shops in Malibu, in order to finance the development of the pedestrian mall near Pepperdine College. How should you adjust your rental rate in the short run, if at all? Explain.
d. (4 points) Should you expect any further adjustments in the Malibu board rental market over the long run given the increase in cost to $40? Briefly discuss. You should take into consideration the fact that your competitors have demand and cost structures similar to your own.
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