Question

In: Economics

York Airlines offers three classes of service on their flights between Toronto and Vancouver: economy, premium...

York Airlines offers three classes of service on their flights between Toronto and Vancouver: economy, premium economy, and business class. Andrew, a student, is willing to pay a maximum of $300 for an economy class ticket, but is willing to pay up to $100 extra to travel in premium economy or in business class. Rebecca, a successful CEO, is willing to pay up to $500 for an economy class ticket, $800 for a premium economy ticket, and $1,000 for a business class ticket. For simplicity, suppose that York Airlines’ marginal costs are negligible (it has to pay a fixed cost to fly the airplane, but there are no marginal costs per seat sold, regardless of the class of service), so the management of the airline simply wants to maximize revenues.

(a) If the airline could perfectly price-discriminate, what class of service, and at what price, would it offer to each of the travelers? What would be the airline’s total revenues in such a case?

(b) Now suppose that the airline cannot perfectly price-discriminate; they must offer tickets in all classes of service to all customers, and tickets in a particular class of service must be sold at the same price to all customers. Suppose that the airline management decides to charge $300 for economy class tickets, $399.99 for premium economy tickets, and $1,000 for business class tickets. What kind of ticket will Andrew purchase? What kind will Rebecca purchase? What are York Airline’s total revenues?

(c) Suppose that business class tickets go on sale, and their price falls to $790. What kind of ticket will Andrew purchase? What kind will Rebecca purchase? What are York Airline’s total revenues?

(d) Suppose that the airline decides to reduce the cost of business class tickets even further, cutting the price down to $590. What kind of ticket will Andrew purchase? What kind will Rebecca purchase? Is this a good pricing strategy for the airline?

(e) Now suppose that York Airlines decides to get rid of the premium economy seats on their fleet. They maintain their $300 economy class tickets, but increase the price of business class tickets back up to $790. Is this a good strategy for the airline?

Solutions

Expert Solution


Related Solutions

Question-4 Travel Agency specializes in flights between Toronto and Peru. It books passengers on Toronto Air....
Question-4 Travel Agency specializes in flights between Toronto and Peru. It books passengers on Toronto Air. North’s fixed costs are $35,000 per month. Toronto Air charges passengers $1,700 per round-trip ticket. Calculate the number of tickets North Travel must sell each month to (a) break even and (b) make a target operating income of $17,000 per month in each of the following independent cases. Required: 1. North’s variable costs are $33 per ticket. Toronto Air pays Sunset 5% commission on...
A company has production factories in Vancouver, Montreal, and Toronto. There are three different production defects...
A company has production factories in Vancouver, Montreal, and Toronto. There are three different production defects that can arise in the production process, we’ll call them defect A, defect B and defect C. During a recent week, the factories in the three cities reported the following occurrences of the three types of product defects: Vancouver Montreal Toronto Defect A 19 26 12 Defect B 21 16 28 Defect C 23 20 45 (a) Which factory has the highest percentage of...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and maintains web-designs for medium size companies. Management of Vancouver office is concerned about the cost of handling web-related matters. WD Imagine Vancouver Office has provided the following data for the year 2019: Junior web-designers salaries          $ 280,000 Senior web-designers salaries            $ 320,000 Office manager salary                        $ 120,000 WD accountant believes that apart from salaries all other expenses are fixed costs and cannot...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and maintains web-designs for medium size companies. Management of Vancouver office is concerned about the cost of handling web-related matters. WD Imagine Vancouver Office has provided the following data for the year 2019: Junior web-designers salaries          $ 280,000 Senior web-designers salaries            $ 320,000 Office manager salary                        $ 120,000 WD accountant believes that apart from salaries all other expenses are fixed costs and cannot...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and...
WD Imagine Inc. has three locations in Canada: Vancouver, Toronto and Montreal. The company develops and maintains web-designs for medium size companies. Management of Vancouver office is concerned about the cost of handling web-related matters. WD Imagine Vancouver Office has provided the following data for the year 2019: Junior web-designers salaries          $ 280,000 Senior web-designers salaries            $ 320,000 Office manager salary                        $ 120,000 WD accountant believes that apart from salaries all other expenses are fixed costs and cannot...
Bright travel agency specializes in flights between toronto and jamaica. it books passengers on ottawa air....
Bright travel agency specializes in flights between toronto and jamaica. it books passengers on ottawa air. brights fixed costs are $25,500 per month. ottawa air charges passengers $1,300 per round trip ticket.   Calculate the number of tickets bright must sell each month to (a) break even and (b) make a target operating income of $10,000 per month in each of the following independent cases. (round up to the nearest whole number. ex 10.2 should be 11) 1. Brights variable costs...
Sparkle Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Ottawa Air....
Sparkle Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on Ottawa Air. Sparkle​'s fixed costs are$ 29,500 per month. Ottawa Air charges passengers $1,600 per​ round-trip ticket. Breakeven number of units = ____ / ____ Calculate the number of tickets Sparkle must sell each month to​ (a) break even and​ (b) make a target operating income of $19,000 per month in each of the following independent cases. ​(Round up to the nearest whole number. For​example, 10.2...
Sunset Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on OshawaOshawa Air....
Sunset Travel Agency specializes in flights between Toronto and Jamaica. It books passengers on OshawaOshawa Air. SunsetSunset​'s fixed costs are $29,500 per month. OshawaOshawa Air charges passengers $1,600 per​ round-trip ticket. Read the requiremennt. Calculate the number of tickets SunsetSunset must sell each month to​ (a) break even and​(b) make a target operating income of $12,000 per month in each of the following independent cases. ​(Round up to the nearest whole number. For​ example, 10.2 should be rounded up to​...
Three airlines serve a small town in Ohio. Airline A has 48% of all scheduled flights,...
Three airlines serve a small town in Ohio. Airline A has 48% of all scheduled flights, airline B has 33% and airline C has the remaining 19%. Their on-time rates are 81%, 69%, and 35%, respectively. A flight just left on-time. What is the probability that it was a flight of airline A?
American Airlines. (AA) is an airline that operates direct, daily flights between Los Angeles (LAX) and...
American Airlines. (AA) is an airline that operates direct, daily flights between Los Angeles (LAX) and London Heathrow (LHR) airports. AA offers only business-class tickets and service on all of its flights. On the LAX-LHR route, AA flies Airbus 320 plane configured to have a capacity of 100 business-class seats. AA sells tickets on LAX-LHR route at $3000 and offers a generous, 90% “last-minute cancellation” policy. In particular, under such policy, a customer may cancel her flight up to 30...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT