Scenario 15-1 An airline knows that there are two types of travelers: business t

Question

Scenario 15-1
An airline knows that there are two types of travelers: business travelers and vacationers. For a particular flight, there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket. There are 150 seats available on the plane. Suppose the cost to the airline of providing the flight is $20,000, which includes the cost of the pilots, flight attendants, fuel, etc.

10. Refer to Scenario 15-1. How much profit will the airline earn if it sets the price of each ticket at $600?
a. -$5,000
b. $15,000

c. $40,000 d. $60,000

11. Refer to Scenario 15-1. How much additional profit can the airline earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket?
a. $15,000
b. $25,000

c. $40,000 d. $70,000

12. If a monopolist can practice perfect price discrimination, the monopolist will a. eliminate consumer surplus.

eliminate deadweight loss.

maximize profits.

All of the above are correct.

Explanation / Answer

Given,

Total seats available = 150

100 business traveller are willing to pay $600 per ticket

50 business traveller are willing to pay $300 per ticket

Cost of airline of providing flight = $20,000

Solution,

10) How much profit will the airline earn if it sets the price of each ticket at $600?

when the airline sell the ticket at $600, only business traveller will be willing to pay for the ticket

Total business traveller = 100

Total money incurred by selling the tickets = $(600 x 100 ) = $60,000

Cost of providing flight = $20,000

Therefore, profit generated = $( 60,000 - 20,000) = $ 40,000

Hence option 'c'

11) By charging differential price to the ticket,

i.e charging each customer their willingness to pay relative to charging a flat price of $600 per ticket

first 100 customers will be business traaveller they will buy the tickets at the flat price of $600, after that the company will sell it's ticket to the vacationer at a price lower than the flat price by maximum price the vaccationer is willing to pay i.e $300

So net xtra profit in this case will be (300 x 50 ) = $15,000

so option 'a'

12)

It must be remembered that the main aim of price discrimination is to increase the total revenue and hopefully the profits of the supplier.

So the monopolist will always try to maximize the profit

So option 'c'

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