6. Elizabeth Airlines (EA) flies only one route: Chicago- Honolulu. The demand for each flight is Q = 500 – P. EA's cost of running each flight is $30,000 plus $100 per passenger. a. What is the profit-maximizing price that EA will charge? How many people will be on each flight? What is EA's profit for each flight? b. EA learns that the fixed costs per flight are in fact $41,000 instead of $30,000. Will the airline stay in business for long? Illustrate your answer using a graph of the demand curve that EA faces, EA's average cost curve when fixed costs are $30,000, and EA's average cost curve when fixed costs are $41,000. c. Wait! EA finds out that two different types of people fly to Honolulu. Type A consists of busi- ness people with a demand of QA Type B consists of students whose total demand is 240 – 0.6P. Because the students are easy to 260 – 0.4P. QB spot, EA decides to charge them different prices. Graph each of these demand curves and their horizontal sum. What price does EA charge the stu- dents? What price does it charge other customers? How many of each type are on each flight? d. What would EA's profit be for each flight? Would the airline stay in business? Calculate the consumer surplus of each consumer group. What is the total consumer surplus? e. Before EA started price discriminating, how much consumer surplus was the Type A demand getting from air travel to Honolulu? Type B? Why did total consumer surplus decline with price discrimination, even though total quantity sold remained unchanged?
6. Elizabeth Airlines (EA) flies only one route: Chicago- Honolulu. The demand for each flight is Q = 500 – P. EA's cost of running each flight is $30,000 plus $100 per passenger. a. What is the profit-maximizing price that EA will charge? How many people will be on each flight? What is EA's profit for each flight? b. EA learns that the fixed costs per flight are in fact $41,000 instead of $30,000. Will the airline stay in business for long? Illustrate your answer using a graph of the demand curve that EA faces, EA's average cost curve when fixed costs are $30,000, and EA's average cost curve when fixed costs are $41,000. c. Wait! EA finds out that two different types of people fly to Honolulu. Type A consists of busi- ness people with a demand of QA Type B consists of students whose total demand is 240 – 0.6P. Because the students are easy to 260 – 0.4P. QB spot, EA decides to charge them different prices. Graph each of these demand curves and their horizontal sum. What price does EA charge the stu- dents? What price does it charge other customers? How many of each type are on each flight? d. What would EA's profit be for each flight? Would the airline stay in business? Calculate the consumer surplus of each consumer group. What is the total consumer surplus? e. Before EA started price discriminating, how much consumer surplus was the Type A demand getting from air travel to Honolulu? Type B? Why did total consumer surplus decline with price discrimination, even though total quantity sold remained unchanged?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:6. Elizabeth Airlines (EA) flies only one route: Chicago-
Honolulu. The demand for each flight is Q = 500 – P.
EA's cost of running each flight is $30,000 plus $100
per passenger.
a. What is the profit-maximizing price that EA will
charge? How many people will be on each flight?
What is EA's profit for each flight?
b. EA learns that the fixed costs per flight are in fact
$41,000 instead of $30,000. Will the airline stay in
business for long? Illustrate your answer using
a graph of the demand curve that EA faces, EA's
average cost curve when fixed costs are $30,000,
and EA's average cost curve when fixed costs are
$41,000.
c. Wait! EA finds out that two different types of
people fly to Honolulu. Type A consists of busi-
ness people with a demand of QA
Type B consists of students whose total demand is
240 – 0.6P. Because the students are easy to
260 – 0.4P.
QB
spot, EA decides to charge them different prices.
Graph each of these demand curves and their
horizontal sum. What price does EA charge the stu-
dents? What price does it charge other customers?
How many of each type are on each flight?
d. What would EA's profit be for each flight? Would
the airline stay in business? Calculate the consumer
surplus of each consumer group. What is the total
consumer surplus?
e. Before EA started price discriminating, how much
consumer surplus was the Type A demand getting
from air travel to Honolulu? Type B? Why did total
consumer surplus decline with price discrimination,
even though total quantity sold remained unchanged?
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