The ‘exclusive’ Harvey Davidson Motorbike Club in Knox currently has 1000 members but is planning on a membership drive to increase this number significantly using two strategies 1 and 2, and needs to determine the optimal membership level under each strategy.
Strategy 1 involves a partnership and paying the Royal Automotive Club Melbourne (RACM) $100 per Harvey Davidson Motorbike Club member to access RACM club facilities in the Melbourne’s CBD. Strategy 2 involves payment of a fixed fee of $200,000 per year for a massive advertising campaign.
The CEO has determined that the membership fee (price for club membership) for the coming year will remain constant at $1,100 per member irrespective of the number of new members added and regardless of whether strategy 1 or 2 is adopted.
In the calculations for determining an optimal membership level, the CEO of the Harvey Davidson Motorbike Club regards price as fixed; therefore, P = MR = $1,100. Before considering the effects of any agreement with the RACM, the CEO projects total cost function during the coming year to be as follows:
TC = $500,000 + $100Q + $0.2Q2
Where Q = number of Motorbike club members
A. Before considering the effects of the proposed agreement with the RACV under Strategy 1 or the marketing campaign under Strategy 2, calculate the marginal cost for Harvey Davidson Motorbike Club. (1 mark) Calculate its optimal membership and profit level. (2 Marks)
B. Will the partnership agreement with RACM affect the optimal membership level? (1 Mark) Calculate optimal (profit maximising) membership and profit levels under strategy 1. (2 Marks)
C. Will the advertising cost under strategy 2 affect the optimal membership level? (1 Mark) Calculate optimal (profit maximising) membership and profit levels under strategy 2. (2 Marks)