Question

Scenario: American Airlines (AA) is trying to maximize profits on a certain international route with two kinds of travelers: vacationers (Group A) and business travelers (Group B). AA can effectively distinguish between the two types and can discriminate in pricing. Although fixed costs matter a lot for the calculation of profits, they do not matter for purposes of optimal pricing, so we’ll ignore them for now; however, we cannot ignore marginal cost, which we will assume is a constant $100 per traveler. (For purposes of calculating total profit below, you can assume no fixed costs, for convenience.) Demand for each type of traveler is given by the following equations, where Q_i and P_i is the quantity and price for type i:

Q_A = 1400 – 2P_A                                Q_B = 1000 – P_B

1. If AA can discriminate between customer types and charge each group a different price, what prices maximize profits?

Show your work here:

Solutions:

Price to type A:
Price to type B:
Quantity of type A:
Quantity of type B:
Total Profit:

Answer 1

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