Aplia: Student 7. Changes In net revenue from price discrimination Consider the
ID: 1138047 • Letter: A
Question
Aplia: Student 7. Changes In net revenue from price discrimination Consider the market for airline tickets on Bicoastal Airlines from San Frandisco to Chicago. The following graph shows the dermand curve, marginal revenue (MR) curve, and marginal cost (MC) curve for this particular flight. In perticular, the cost of adding another passenger to an otherwise empty seat is constant at $150. For simplicty, assume throughout this question that there are no supply constraints caused by seating capacity limitations Suppose Bicoastal Airlines sells each seat on the plane for the same price. Place the purple poaint (diamond symbol) on the axes. Then, place the grey rectangle (star symbols) to shade the area representing net operating revenue at graph at the profit-maximizing price and quantity. Dashed drop lines vwill automatically extend to both 500 T Profit Max 300 Net Revenue MCExplanation / Answer
Answer.
Consider the first situation, when there is no price discrimination. The airline will charge one price to all its customers, the equilibrium condition is Marginal Revenue = Marginal Cost, as per the first diagram, where MR=MC, the equilibrium Price = $250 and Equilibrium quantity = 60 passengers.
So the Total Revenue in this case will be P*Q = 250*60 = $15,000
Now consider situation 2, when airline discriminates price among business class customers and regular customers.
The size of business class travellers = 40 passengers and the size of regular travellers = 40 passengers.
Total Revenue from Business class= $300*40 = 12,000
Total Revenue from Regular Class = $200*40 = 8,000
Total Revnue = 12,000+8,000 = $20,000
So, when airline discriminates price among different travellers, it increases its net operating revenue by $5,000 (20,000-15,000).
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