Determine will the airline stay in business for long

Reference no: EM13221726

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?

c. EA finds out that two different types of people fly to Honolulu. Type A consists of business people with a demand of QA = 260 - 0.4P. Type B consists of students whose total demand is QB = 240 - 0.6P. Because the students are easy to spot, EA decides to charge them different prices. What price does EA charge the students? What price does it charge the other customers? How many of each type are on the flight. Assume that the fixed costs are $41,000 per flight.

d. What would EA's profit be for each flight, assuming that the fixed costs are $41,000 per flight? Would the airline stay in business?

e. Based on your answer to (b) and (d), explain why consumer surplus changes with price discrimination.

Reference no: EM13221726

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