Question

There are 1000 potential travellers each day on the Cop

enhagen

-

Oslo route, of which 500 are yuppies and 500 are hippies. Yuppies are willing to pay 700.00 for an unrestricted ticket

and 400.00 for a restricted ticket. Hippies are willing to pay 500.00 for an unrestricted ticket

and 300.00 for a restricted ticket. Travellers buy the ticket that gives them the highest

surplus (equal to the difference between the willingness to pay and the price), provided that

this surplus is positive. Among the following price policies, which one results in the highest

revenues?

a)

700.00 for an unrestricted ticket and 300.00 for

a restricted ticket.

b)

699

.00 for an unrestricted ticket and 299.00 for a restricted ticket.

c)

598.00 for an unrestricted ticket and 299.00 for a restricted ticket.

d)

498.00 for an unrestricted ticket and 199.00 for a restricted ticket.

Answer 1

For option A, the hippies will not be able to purchase the unrestricted ticket because the price is higher than their willingness to pay and the price of restricted ticket is equal to their willingness to pay. So they will buy the restricted ticket. So revenue from the hippies = 300*500 = $1,50,000

For Yippies, the surplus from unrestricted ticket will be (700-700) = $0 and the surplus from the restricted ticket will be (400-300) = $100. So the Yippies will buy the restricted ticket and the revenue from the Yippies will be = 500*300 = $1,50,000

So, total revenue from the pricing in option A =

= $150,000 + $150,000

= $300,000

For option B, the hippies will not be able to purchase the unrestricted ticket because the price is higher than their willingness to pay and the price of restricted ticket is equal to their willingness to pay. So they will buy the restricted ticket. So revenue from the hippies = 299*500 = $1,49,500

For Yippies, the surplus from unrestricted ticket will be (700-699) = $1 and the surplus from the restricted ticket will be (400-299) = $101. So the Yippies will buy the restricted ticket and the revenue from the Yippies will be = 500*299 = $1,49,500

So, total revenue from the pricing in option B=

= $149,500 + $149,500

= $299,000.

For option C, the hippies will not be able to purchase the unrestricted ticket because the price is higher than their willingness to pay and the price of restricted ticket is equal to their willingness to pay. So they will buy the restricted ticket. So revenue from the hippies = 299*500 = $1,49,500

For Yippies, the surplus from unrestricted ticket will be (700-598) = $102 and the surplus from the restricted ticket will be (400-299) = $101. So the Yippies will buy the unrestricted ticket and the revenue from the Yippies will be = 500*598 = $2,99,000

So, total revenue from the pricing in option C =

= $149,500 + $299,000

= $448,500.

For option D, the surplus for the Hippies from unrestricted ticket will be (500-498) = $2 and the surplus from the restricted ticket will be (300-199) = $101. So they will buy the restricted ticket. So revenue from the hippies = 199*500 = $99,500

For Yippies, the surplus from unrestricted ticket will be (700-498) = $202 and the surplus from the restricted ticket will be (400-199) = $201. So the Yippies will buy the unrestricted ticket and the revenue from the Yippies will be = 498*500 = $249,000

So, total revenue from the pricing in option D =

= $99,500+ $249,000

= $348,500

So, we can see that with the pricing of option C, which says that the price of unrestricted tickets is $598 and the price of the restricted tickets is $299, the revenue will be maximum. The revenue from this pricing will be $448,500. So option C is the correct answer.

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