Problem 2 Suppose an airline has monopoly over a certain route. The estimated price elasticity of demand for business travelers is EB=-1.9, while the price elasticity of demand for leisure travelers is EV=-2.1. The airline wants to set the prices separately for business and vacation travelers. a) If the marginal cost of transporting each passenger is the same, and the airline is able to separate the two groups perfectly, what is the optimal surcharge (in %) on business travelers? (for example, if leisure travelers pay 100, and business travelers pay 200, then the surcharge is 100%) Answer= b) Suppose that in order to separate business travelers, the airline must offer them slightly better conditions on board (for example, serve them a meal). As a result, the marginal cost of flying a business traveler is 30% higher than for a leisure traveler. What is the optimal surcharge (in %) on business travelers in this case? Answer= c) Now suppose the airline introduces a Basic Economy fare, where it outright bullies its customers throughout the flight, to attract the most price sensitive segment of the population. Assuming that the marginal cost of operating the Basic Economy class is the same as for regular leisure travelers, but the tickets are 20% cheaper, what is the price elasticity of demand among its customers? Answer=
Problem 2
Suppose an airline has
a) If the marginal cost of transporting each passenger is the same, and the airline is able to separate the two groups perfectly, what is the optimal surcharge (in %) on business travelers? (for example, if leisure travelers pay 100, and business travelers pay 200, then the surcharge is 100%)
Answer=
b) Suppose that in order to separate business travelers, the airline must offer them slightly better conditions on board (for example, serve them a meal). As a result, the marginal cost of flying a business traveler is 30% higher than for a leisure traveler. What is the optimal surcharge (in %) on business travelers in this case?
Answer=
c) Now suppose the airline introduces a Basic Economy fare, where it outright bullies its customers throughout the flight, to attract the most price sensitive segment of the population. Assuming that the marginal cost of operating the Basic Economy class is the same as for regular leisure travelers, but the tickets are 20% cheaper, what is the price elasticity of demand among its customers?
Answer=
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