Suppose an airline flying on the New York - Chicago route has estimated the dema

Question

Suppose an airline flying on the New York - Chicago route has estimated the demand curves for three different types of customers: business (no advance purchase), leisure (7 day advance purchase), and discount (14 day advance purchase) travellers. They are: Business: P = 600 - Q and MR = 600 - 2Q Leisure: P = 500 - 2Q and MR = 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 $200. What prices will the airline charge to each of the three different segments of customers? Please show your work.

Explanation / Answer

To maximize profits you set MR=MC so

Business 600- 2Q=200

Q= 290 P= 600-200= 400

Leisure 500-4Q= 200

Q= 75 P= 500-2*75= 350

Discount 400-6Q=200

Q= 33.33 so P= 400-3*33.33= 300

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