Posted by too old on Wednesday, November 11, 2009 at 9:13pm.
Airline pricing is a good example of price discrimination. Airlines set different prices for first-class and excursion. Suppose the economics division of a major airline company estimates the demand and marginal revenue functions for first-class and excursion fares from Los Angeles to Beijing as:
Qa = 2100 - 0.5 Pa
MRa = 4200 - 4 Qa
Qb = 8800 - 4 Pb
MRb =2200 - 0.5 Qb
where Q = number of passengers and P = ticket price
a. If the marginal cost of production is $200 per passenger, what fare and what number of passengers will maximize profit?
b. Would the airline make more profit by charging a single price? (If a single price is to be set, the demand equations from each market segment have to be combined)
To: Economyst - Can you please help? - economyst, Thursday, November 12, 2009 at 11:29am
First, lets re-write the demand equations, to be P=f(Q).
Pa = 4200 - 2Qa
MRa = 4200 - 4Qa
Pb = 2200 - .25*Qb
MRb = 2200 - .5*Qb
a) set MC = MR in each equation, then solve for Qa and Qb. I get Qa=1000, Qb=4000. Ergo, Pa=2200, Pb=1200.
b) Undoubtedly, the airline will make more profit by charging two prices instead of one. The two prices I calculated are the profit-maximizing prices in each market; so the firm cant do any better than that.
(Do you need to calculate the profit-maximizing price if the firm was forced to charge a single price??. It's a little tricky operation, but very do-able.)
Answer This Question
More Related Questions
- Economics/Algebra - Airline pricing is a good example of price discrimination. ...
- Economics/Math - Airline pricing is a good example of price discrimination. ...
- economics - Suppose a monopolist faces an inverse demand function P=100-1/2Q, ...
- Economic Theory - What is the price elasticity of supply for your chosen ...
- Econ - If a pure monopolist can price discriminate by separating buyers into two...
- Managerial Economics/Math - This is an MBA-level Managerial Economics course. I ...
- economics - Suppose two competing airlines that service passengers only between ...
- stats - 8.a) Consider the data below for Alaska Airlines and for American West ...
- managerial economics - Entry of new airlines to the CARICOM region is severely ...
- economics - suppose the demand curve for a product is given by Q=10-2P+Ps1,where...