Suppose an airline sells air tickets to two types of customer – business travelers and vacation travelers. Their estimated demand elasticities are -2.5 and -4.0 respectively. Suppose the marginal cost is constant at $240, and the services provided to the two types of customer are similar. Calculate the fares the airline should charge on the air tickets sold to the respective types of customers. Show your calculations.

Suppose an airline sells air tickets to two types of customer – business travelers and vacation travelers. Their estimated demand elasticities are -2.5 and -4.0 respectively. Suppose the marginal cost is constant at $240, and the services provided to the two types of customer are similar. Calculate the fares the airline should charge on the air tickets sold to the respective types of customers. Show your calculations.

Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)

14th Edition

ISBN:9781305506381

Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris

Chapter14: Pricing Techniques And Analysis

Section: Chapter Questions

Problem 2E: The price elasticity of demand for air travel differs radically from first-class (1.3) to...

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Suppose an airline sells air tickets to two types of customer - business travelers and vacation travelers. Their estimated demand elasticities are -2.5 and -4.0 respectively. Suppose the marginal cost is constant at $240, and the services provided to the two types of customer are similar a. Based on the given information, explain with TWO practical reasons whether the airline should charge a higher price on business travelers or vocational travelers. Explain without calculation. b. Calculate the fares the airline should charge on the air tickets sold to the respective types of customers. Show your calculations. c. Suggest TWO practical methods the airline can differentiate the two types of customers and charge them the corresponding fares. Explain briefly
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