Explain why an economy in which airlines charge different passengers different p

Question

Explain why an economy in which airlines charge different passengers different prices for the same flight will not have exchange efficiency. b. Going back to our two good (Apples, Oranges), two person (Ed, Mary) economy, suppose that at a given allocation, Ed’s MRSAO is 3 and Mary’s MRSAO is 1. Use proof by contradiction to show that this allocation is not exchange efficient. Identify a trade that will increase the utility of Ed and Mary. Explain. Show this graphically (with indifference curves).

Going back to our two good (Apples, Oranges), two person (Ed, Mary) economy, suppose that at a given allocation, Ed’s MRSAO is 3 and Mary’s MRSAO is 1. Use proof by contradiction to show that this allocation is not exchange efficient. Identify a trade that will increase the utility of Ed and Mary. Explain. Show this graphically (with indifference curves).

Explanation / Answer

Suppose we had two passengers A and B in the same flight. Passenger A opted for economy class while the latter opted for the premium class. However, since the flight is the same, both the passengers will have to avail certain facilities that are common to both. Take for example the washroom. If passenger A paid $55 for an international flight from N.York to Madrid, he/she will avail the same toilet facility as availed by passenger B who paid $70 for the same flight. The other passenger might get a better seating arrangement but the same food and better service from the crew. But passenger B thinks all this does not suffice the $75 paid by her since the toilet was only ordinary and took use of it as the rest of the passengers. Thus, there is absence of exchange efficiency here. There is also an addition here - since the arline got the better from passenger B, they were at a gain while the passenger thought her trasnaction to be a loss to her.

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