Question: Price Discrimination

Elizabeth Airlines flies only one route: Chicago-Honolulu. The demand for each flight on this route is: Q = 500 – P. Elizabeth's costs of running each flight is $30,000 plus $100 per passenger. Please answer the following questions:

1. What is the profit maximizing price EA will charge and how many people will be on each flight? What is EA's profit for each flight?
2. Elizabeth learns that the fixed costs per flight are $41,000 instead of $30,000. Will she stay in Business long?
3. 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 with a demand QB = 240 – 0.6P. The students are easy to spot, so Elizabeth decides to charge them different prices. What price does Elizabeth charge the students? What price does Elizabeth charge the other customers? How many of each type are on each flight?
4. What would EA’s profit be for each flight? Would she stay in business? Calculate the consumer surplus of each consumer group. What is the total consumer surplus?
5. Before EA started price discrimination, how much consumer surplus was the Type A demand getting from air travel to Honolulu? Type B? Why did the total consumer surplus decline with price discrimination, even though the total quantity sold was unchanged?

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