Case 3 (10 marks) VietJet is an international low-cost airline from Vietnam. As a low-cost carrier,...

Case 3 VietJet is an international low-cost airline from Vietnam. As a low-cost carrier, VietJet offers the different fares based on seasonal demands in order to maximize their profit and hence the fares vary as per the demand during peak and off-peak season. The airline’s total demand is given by; Q = 1200 – 8P, where Q is the number of passengers (in thousands) per year and P is the fare in US dollars. The demand in the peak season is given by; Q = 640 – 3P and this demand function is different in offpeak season which is given by; Q = 560 – 5P. Assume that the fixed cost is $12 million per year with a constant marginal cost of $120 per passenger. Based on this information, discuss the below parts:

a) Calculate the maximum profit, price and number of passengers given that the airline charges only one prices irrespective of the season.

b) Calculate the maximum profit, price and number of passengers given that the airline charges different prices based on the season.

c) Calculate and comment on the demand elasticities at the price where they get maximum profit based on your answer in part (b) above.

d) Why do you think the airline would like to charge the different prices in different seasons? What benefits can it bring to the VietJet by doing so? Explain.

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Rahul Sunny answered 1 year ago

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