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7. Changes in net revenue from price discrimination Consider the market for airline tickets on WestEast Airlines from Seattle to Chicago. 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 $150. For simplicity, assume throughout this question that there are no supply constraints caused by seating capacity limitations. Suppose WestEast Airlines sells each seat on the plane for the same price. Place the purple point (diamond symbol) on the graph at the profit-maximizing price and quantity. Dashed drop lines will automatically extend to both axes. Then, place the grey rectangle (star symbols) to shade the area representing net operating revenue at the profit-maximizing price and quantity. 500 Profit Max. 400 300 Net Revenue 200 MC 100 MR Demand 40 80 120 160 200 QUANTITY (Passengers per flight) Suppose now that WestEast Airlines discovers that business travelers' demand for airline tickets is more inelastic than that of vacationers, retirees, and students. For price discrimination to be implemented, there must be a way of distinguishing between business and nonbusiness customers. Suppose WestEast Airlines successfully segments its market into business travelers and all other travelers by charging higher ticket prices to people who don't stay over a weekend, who spend only a day or two at their destination, or who make reservations a short time before their flight. The following graph shows the company's demand curve and marginal cost (MC) curve. PRICE (Dollars per ticket)

7. Changes in net revenue from price discrimination Consider the market for airline tickets on WestEast Airlines from Seattle to Chicago. 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 $150. For simplicity, assume throughout this question that there are no supply constraints caused by seating capacity limitations. Suppose WestEast Airlines sells each seat on the plane for the same price. Place the purple point (diamond symbol) on the graph at the profit-maximizing price and quantity. Dashed drop lines will automatically extend to both axes. Then, place the grey rectangle (star symbols) to shade the area representing net operating revenue at the profit-maximizing price and quantity. 500 Profit Max. 400 300 Net Revenue 200 MC 100 MR Demand 40 80 120 160 200 QUANTITY (Passengers per flight) Suppose now that WestEast Airlines discovers that business travelers' demand for airline tickets is more inelastic than that of vacationers, retirees, and students. For price discrimination to be implemented, there must be a way of distinguishing between business and nonbusiness customers. Suppose WestEast Airlines successfully segments its market into business travelers and all other travelers by charging higher ticket prices to people who don't stay over a weekend, who spend only a day or two at their destination, or who make reservations a short time before their flight. The following graph shows the company's demand curve and marginal cost (MC) curve. PRICE (Dollars per ticket)

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
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Problem 1QTC
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7. Changes in Net Revenue from Price Discrimination Consider the market for airline tickets on WestEast Airlines from Seattle to Chicago. 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 $150. For simplicity, assume throughout this question that there are no supply constraints caused by seating capacity limitations. Suppose WestEast Airlines sells each seat on the plane for the same price. Place the purple point (diamond symbol) on the graph at the profit-maximizing price and quantity. Dashed drop lines will automatically extend to both axes. Then, place the gray rectangle (star symbols) to shade the area representing net operating revenue at the profit-maximizing price and quantity. ### Graph Explanation - **Axes:** - The x-axis represents QUANTITY (Passengers per flight), ranging from 0 to 200. - The y-axis represents PRICE (Dollars per ticket), ranging from 0 to 500. - **Curves:** - **Demand Curve:** Slopes downward, starting from a high price at low quantity to a low price at high quantity. - **Marginal Revenue (MR) Curve:** Lies below the demand curve and also slopes downward. - **Marginal Cost (MC) Line:** Horizontal line at $150, indicating constant marginal cost per passenger. - **Point and Area:** - **Profit Maximization Point (Purple Diamond):** The point where the MR curve intersects the MC line. - **Net Revenue Area (Gray Rectangle):** The area between the MR curve and MC line, up to the profit-maximizing quantity. Suppose now that WestEast Airlines discovers that business travelers’ demand for airline tickets is more inelastic than that of vacationers, retirees, and students. For price discrimination to be implemented, there must be a way of distinguishing between business and nonbusiness customers. Suppose WestEast Airlines successfully segments its market into business travelers and all other travelers by charging higher ticket prices to people who don’t stay over a weekend, who spend only a day or two at their destination, or who make reservations a short time before their flight. The following graph shows the company’s demand curve and marginal cost (MC) curve.
Transcribed Image Text:7. Changes in Net Revenue from Price Discrimination Consider the market for airline tickets on WestEast Airlines from Seattle to Chicago. 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 $150. For simplicity, assume throughout this question that there are no supply constraints caused by seating capacity limitations. Suppose WestEast Airlines sells each seat on the plane for the same price. Place the purple point (diamond symbol) on the graph at the profit-maximizing price and quantity. Dashed drop lines will automatically extend to both axes. Then, place the gray rectangle (star symbols) to shade the area representing net operating revenue at the profit-maximizing price and quantity. ### Graph Explanation - **Axes:** - The x-axis represents QUANTITY (Passengers per flight), ranging from 0 to 200. - The y-axis represents PRICE (Dollars per ticket), ranging from 0 to 500. - **Curves:** - **Demand Curve:** Slopes downward, starting from a high price at low quantity to a low price at high quantity. - **Marginal Revenue (MR) Curve:** Lies below the demand curve and also slopes downward. - **Marginal Cost (MC) Line:** Horizontal line at $150, indicating constant marginal cost per passenger. - **Point and Area:** - **Profit Maximization Point (Purple Diamond):** The point where the MR curve intersects the MC line. - **Net Revenue Area (Gray Rectangle):** The area between the MR curve and MC line, up to the profit-maximizing quantity. Suppose now that WestEast Airlines discovers that business travelers’ demand for airline tickets is more inelastic than that of vacationers, retirees, and students. For price discrimination to be implemented, there must be a way of distinguishing between business and nonbusiness customers. Suppose WestEast Airlines successfully segments its market into business travelers and all other travelers by charging higher ticket prices to people who don’t stay over a weekend, who spend only a day or two at their destination, or who make reservations a short time before their flight. The following graph shows the company’s demand curve and marginal cost (MC) curve.
The image explains the concept of price discrimination by WestEast Airlines through a graph illustrating the company's demand curve and marginal cost (MC) curve. ### Text Description WestEast Airlines segments its market into business travelers and other travelers by charging higher ticket prices to people who don’t stay over a weekend, who spend only a day or two at their destination, or who make reservations a short time before their flight. **Point A:** - Represents the price charged to business travelers ($300) and involves 40 business travelers. **Point B:** - Indicates the price charged to other travelers ($200) with a total of 80 travelers willing to buy at this price if the market were not segmented. With 40 business travelers purchasing at $300, 40 other travelers will buy tickets at $200 (calculated as 80 - 40 = 40 passengers). ### Graph Explanation The graph contains: - **Axes:** - X-axis: Quantity (Passengers per flight) - Y-axis: Price (Dollars per ticket) - **Curves:** - Demand curve (blue line) showing a decrease in price with an increase in quantity. - MC curve (orange line), representing the marginal cost. - **Points:** - **A** at $300 for 40 business travelers. - **B** at $200 for 80 travelers. ### Task Shade specific areas: - **Purple Rectangle (Diamonds):** Representing net operating revenue from business travelers. - **Green Rectangle (Triangles):** Representing net operating revenue from other travelers. ### Summary Sentence "When WestEast Airlines price discriminates, it _______ its net operating revenue by _______." ### Note Fill in the blanks based on calculations of shaded areas representing revenue differences due to price discrimination.
Transcribed Image Text:The image explains the concept of price discrimination by WestEast Airlines through a graph illustrating the company's demand curve and marginal cost (MC) curve. ### Text Description WestEast Airlines segments its market into business travelers and other travelers by charging higher ticket prices to people who don’t stay over a weekend, who spend only a day or two at their destination, or who make reservations a short time before their flight. **Point A:** - Represents the price charged to business travelers ($300) and involves 40 business travelers. **Point B:** - Indicates the price charged to other travelers ($200) with a total of 80 travelers willing to buy at this price if the market were not segmented. With 40 business travelers purchasing at $300, 40 other travelers will buy tickets at $200 (calculated as 80 - 40 = 40 passengers). ### Graph Explanation The graph contains: - **Axes:** - X-axis: Quantity (Passengers per flight) - Y-axis: Price (Dollars per ticket) - **Curves:** - Demand curve (blue line) showing a decrease in price with an increase in quantity. - MC curve (orange line), representing the marginal cost. - **Points:** - **A** at $300 for 40 business travelers. - **B** at $200 for 80 travelers. ### Task Shade specific areas: - **Purple Rectangle (Diamonds):** Representing net operating revenue from business travelers. - **Green Rectangle (Triangles):** Representing net operating revenue from other travelers. ### Summary Sentence "When WestEast Airlines price discriminates, it _______ its net operating revenue by _______." ### Note Fill in the blanks based on calculations of shaded areas representing revenue differences due to price discrimination.
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