MBAA 523 Advanced Aviation Economics – Problem Set 6

1. Chevrolet offers five cars: the Spark, Sonic, Cruze, Malibu, and Impala with suggested retail prices of $12,270; $14,245; $16,170; $22,565, and $27,060 respectively. Is this price discrimination? Explain why or why not.

2. You sell consumer products in the Americas. The price sensitivity of South American consumers seems greater than for those in North America. An economic consulting firm has estimated the own-price elasticity for your most profitable product is -1.25 in North America and -1.50 in South America. Your marginal cost is constant at $75 across most of your production volume capability. What prices will maximize profits? Show the computation.

3. Define the 3 types of price discrimination. Provide an example of 1st degree discrimination and explain why it is difficult to practice.

4. You are a pricing analyst at a global network airline. Using historical data, you have determined that the demand for coach seats for passengers traveling for business and those traveling for leisure are: 1) business demand: P = 200 – 3Q, and 2) leisure demand: P = 120 – 0.6Q. The marginal cost for a passenger in coach class is $20. What price should you set for each type of passenger and how many seats should be sold to each? Show the computations.

5. Complete and label the diagram showing the numbers of seats sold and price for leisure and business passengers. Answer the following questions:

a. If MC increases modestly, will fares increase?

b. Are all seats sold? If not, wouldn’t the airline make more money by selling more seats at a lower price?

c. What recommendation would you make for the fleet assignment to this route?