Question

9. The logic of price discrimination Aa Aa Consider the market for airline tickets on Trans-America Airlines from Los Angeles to Philadelphia. The following graph shows the demand curve, marginal revenue (MR) curve, and marginal cost (MC) curve for this particular flight In particular, the cost of adding another passenger to an otherwise empty seat is constant at $80. For simplicity, assume throughout this question that there are no supply constraints owing to seating capacity and assume that there are no fixed costs Suppose Trans-America Airlines sells each seat on the plane for the same price. Place the red point (cross symbol) at the profit-maximizing price and quantity. Dashed drop lines will automatically extend to both axes. Then, use the purple rectangle (diamond symbols) to shade the area representing profit at the profit-maximizing price and quantity. PRICE, COST, MR (Dollars per ticket] 400 X Profit Max 320 Profit 240 160 MC 80 MR Demand 120 200 40 80 160 QUANTITY (Passengers per flight Help Clear ALL

Answer 1

(1) Profit is maximized at intersection of MR and MC with price $240, quantity 80 and ATC (= MC) $80.

Profit = Q x (P - ATC) = 80 x $(240 - 80) = 80 x $160 = $12,800

PRICE, COST, MR (Dollars per ticket] 400 X Profit Max 320 Profit 160 MC 80 C Demand 120 40 160 200 80 QUANTITY IPassengers per flight] Help Clear AlL

(2) Since I cannot access your graph tool, I'm labelling the areas you need to shade in the second graph (since there will be overlapping regions).

For Business travelers, Price = $280, Quantity = 60, ATC = $80.

Profit = Area ABCD = 60 x $(280 - 80) = 60 x $200 = $12,000

For Other travelers, Price = $200, Quantity = 40, ATC = $80.

Profit = Area DEOF = 40 x $(200 - 80) = 40 x $120 = $4,800

Total profit = $(12,000 + 4,800) = $16,800

PRICE, COST, MR (Dollars per ticket) 400 + Profit 320 Δ Profit Other 240 0 160 MC IC Demand 40 120 160200 80 QUANTITY [Passengers per flght Help Clear AlL

(3) When it price discriminates, it increases profit by $4,000 (= $16,800 - $12,800).