If there are open first-class seats available on a particular flight, some airlines allow customers with coach (discount) tickets to upgrade to first-class tickets during the electronic check-in process. Suppose the regular price of a first-class ticket is $800, the total price of the upgrade ticket (original price plus the upgrade) is $400, the marginal cost of serving both types of customers (full-fare and upgrade first-class flyers) is $100, and the airline maximizes profits. Which of the following statements is true?
A) MR for the full-fare customers must be higher than the MR from upgrade customers.
B) MR for the full-fare customers may be higher or lower than the MR from upgrades.
C) MR = MC for the full-fare customers, but the airline is willing to collect any positive amount from the upgrade customers.
D) MR must be the same for both full-fare and upgrade customers.

Question

Quizplus · Accepted Answer

In a profit-maximizing scenario, the marginal revenue (MR) from selling an additional unit (in this case, a seat) must equal the marginal cost (MC) of that unit, regardless of the customer segment (full-fare or upgrade). Since the airline is willing to sell upgrades at a lower price, it indicates that filling the seat (even at a lower price) is preferable to leaving it empty, as long as the price covers the marginal cost. This approach maximizes profit by ensuring all seats generate revenue above their marginal cost, leading to the conclusion that MR must be the same for both full-fare and upgrade customers to achieve profit maximization.

If There Are Open First-Class Seats Available on a Particular