Princessa Airlines is the only company that travels between Milan and Bangkok. T

Question

Princessa Airlines is the only company that travels between Milan and Bangkok. There is only the flight per day. The demand for each flight is given by

P = 500 - Q and MR = 500 -2Q and MC = $100 per passenger.

What is the profit maximizing price Princessa will charge?

How many people will be on each flight?

What if Pricessa Airlines finds out that there are two different types of customers who fly to Bangkok; business people and tourist.

The demand equation for business people is Pb = 650 - 2.5Qb and the demand function for tourists is Ps = 400 -1.67Qs

Suppose Pricessa Airlines practices price discrimination, what price will the airline charge business people and what price will it charge tourists?

Explanation / Answer

P = 500 - Q and MR = 500 -2Q and MC = $100 per passenger.

In a perfectly competitive market, P=MC

500 -Q = 100; Q = 400 (PEOPLE ON THE FLIGHT)

Therefore, P = $100 (Profit maximizing price)

Pb = 650 - 2.5Qb and the demand function for tourists is Ps = 400 -1.67Qs.

It will charge MR=MC

MRb = 650 - 5q = 100

q = 110; p = 375

Ps = 400 -1.67Qs.

MRs = 400 - 3.34q = 100

q = 89.8; p = 250

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