Question

Air Shangrila sells to both tourist and business travelers on its single route. Tourists always stay over on Saturday nights, while business travelers never do. The weekly demand function of tourists is

          QdT=8,000−5P,

and the weekly demand function of business travelers is

          QdB=2,000−0.5P.

The marginal cost of a ticket is $350.

Instructions: Round your answers to 2 decimal places as needed. For elasticities, include a negative sign if necessary.

a. What prices should Air Shangrila set for its tourist ticket and its business ticket?

    P_tourist = $.

    P_business = $.

b. If the government passes a law that says all tickets must cost the same amount, what price will Air Shangrila set? (Assume Air Shangrila sells to both types of consumers. That is, profit from selling to both types of consumers will be greater than profit without price discrimination where price is set so high that only one group demands a positive quantity.)

    P = $.

c. What would be the elasticities of demand for the two groups at that price?

    E^d_tourist = .

    E^d_business = .

Answer 1

Air shangrila sell to both tourist and the business travels and the demand equation is:

tourists:

  QdT=8,000−5P,

business travelers:

QdB=2,000−0.5P.

a) Equilibrium price for the tourists and the business is:

QdT=8,000−5P ...........................(1)

Put Q in ..(1)

3125 = 8000 - 5P

P = 975

The price of the tourist is $975

QdB=2,000−0.5P. ...........................(2)

Put Q in ..(2)

912.5 = 2000 - 0.5P

P = 2175

The price of the tourist is $2175

b)

Put Q back

So airshangrila market price is $1077

c)

Elasticity of tourist:

Price elasticity = (% change in quantity)/(%change in price)

Elasticity of business:

Price elasticity = (% change in quantity)/(%change in price)