Elizabeth Airlines (EA) flies only one route: Chicago-Honolulu. The demand for each flight on this route is Q = 500 - P. Elizabeth's cost of running each flight is $30,000 plus $100 per passenger.
a. What is the profit-maximizing price EA will charge? How many people will be on each flight? What is EAs profit for each flight?
b. Elizabeth learns that the fixed costs per flight are in fact $41,000 instead of $30,000. Will she stay in this business 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 EAs average cost curve when fixed costs are $41,000.
c. Wait! Elizabeth finds out that two different types of people fly to Honolulu. Type A is business people with a demand of QA = 260 - 0.4P. Type B is students whose total demand is QB = 240 - 0.6P. The students are easy to spot, so Elizabeth decides to charge them different prices.
Graph each of these demand curves and the horizontal horizontal sum of them. What price does Elizabeth charge the students? What price does she charge the other customers? How many of each type are on each flight?
d. What would EAs profit be for each flight? Would she 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 the total surplus decline with price discrimination, even though the total quantity sold was unchanged?