Suppose an airline flying on the Charlotte - Chicago route has estimated the dem

ID: 1194706 • Letter: S

Question

Suppose an airline flying on the Charlotte - Chicago route has estimated

the demand curves for three different types of customers: business (no

advance purchase), leisure (7 day advance puchase), and discount (14 day

advance purchase) travellers. They are: Business: P = 600 Q and

MR = 600 2Q Leisure: P = 500 2Q and MR = 500 4Q; Discount:

P = 400 3Q and MR = 400 6Q. Assume there is only one class of

service, hence the marginal cost of providing the service is equal for all

customers and is $100. What prices will the airline charge to each of the

three different segments of customers. (Hint: Set MR=MC for each class

of travel).

P= 600-Q

MR= 600-2Q

MC=100

Equating MR and MC we get,

600-2Q = 100

500=2Q

Q= 250

Plugging the value in the demand equation we get,

P= 600-250=350

For the business customers they will charge $250.

Leisure group of customers;

P= 500-2Q

MR= 500-4Q

MC=100

Equating MR and MC we get,

500-4Q = 100

400= 4Q

Q= 100

Plugging Q=100 in the demand equation we get,

P= 500-2Q

P= 500- 2*100

= 500- 200= $300

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