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Market power, price discrimination

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Airline flies only one route. Demand for each flight is Q=500-P. Cost of running each flight is $30,000 plus $100 per passenger.

a. What is the profit maxmizing price the airline will charge.
b. How many people will be on each flight.
c. What is the profit for each flight.
d. If fixed cost is $41000 instead of $30,000, will the airline stay in business. Graph the situation (AC curve when FC=$30,000 and AC curve when FC=$41,000)

Assume two different types of people, students(a) and businesspeople(b), fly the airline, such that Qa=260-0.4P and Qb=240-0.6P. If the airline charges different prices,
f. draw the demand curve for each.
g. Find price charged each student.
h. Find price charged others customers.
g. How many students on each light.
h. how many other customers on each flight.

Asume FC is again $30,000
i. What is profit for each flight.
j. Would the airline stay in business.
k. Find consumer surplus for students; for other customers; total consumer surplus.

Before the price discrimination,
l. What was consumer surplus for students; for businesspeople.
m. Why did total consumer surplus decline with price discrimination, even though quantity sold remained the same.

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Solution Summary

Market power, price discrimination, and other issues are described.

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Pricing and Market Power

Wet-n-Wild Indoor Water Park offers family fun year-round in the Northstar state to locals and out-of-state visitors to the nearby Mall of America. The demand for day-passes to the water park for each market segment is independent of the other market segment. The marginal cost of providing service to each visitor is $5 per day. Suppose the daily demand curves for the two market segments are:

Locals - QL=3000-200P or P=15-0.005*QL
Out of towners - QO = 3000-100P or P=30-0.01*QO

(a.) If Wet-n-Wild Indoor Water Park charges one price to all visitors, what is the profit maximizing price? How many day-passes will be sold per day?
(b.) If Wet-n-Wild Indoor Water Park charges one price to locals, what is the profit maximizing price for locals? How many day-passes will be sold per day to locals?
(c.) If Wet-n-Wild Indoor Water Park charges one price to out-of-towners, what is the profit maximizing price for out-of-town guests? How many day-passes will be sold per day to out-of-town guests?
(d.) Compare the prices from uniform pricing to the prices from price discrimination.

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