Your sole objective as CEO is to maximise profit for the airline. Under this assumption, would you as the CEO prefer to deliberately damage your service in economy? That is, would you prefer to update your offering from [economy and business] to [misery and business]? Explain please.
Suppose you are working as the CEO of an airline. One of your airline's wide-body aircraft operates in a two-class configuration with 500 economy seats and 200 business seats.
On the routes the wide-body aircraft flies, the airline's marginal cost per passenger is $1,000 in economy and $1,500 in business.
According to the airline's internal data, the willingness to pay (WTP) of leisure pax for economy travel is $2,000, while their WTP for business travel is $2,500. On the other hand, business pax' WTP for economy travel is $4,500, while their WTP for business travel is $10,000. Finally, airlines charge different fares for economy and business, and there are more pax with WTP's as specified above than the number of seats in each class.
The maximum certified capacity for this widebody aircraft is 500 seats in economy, so the airline cannot increase the number of seats in this class any further. But if airlines deliberately degrade service in economy even further (e.g. by offering less appetizing food or delaying the check-in process), effectively turning the economy into misery; internal estimates show that the WTP of the leisure pax for traveling in misery class is $1,800 while the WTP of the business pax traveling in misery class is $3,000.
m) Your sole objective as CEO is to maximise profit for the airline. Under this assumption, would you as the CEO prefer to deliberately damage your service in economy? That is, would you prefer to update your offering from [economy and business] to [misery and business]? Explain please.
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