An airline knows that there are two types of travelers: business travelers and vacationers.For a particular flight,there are 100 business travelers who will pay $600 for a ticket while there are 50 vacationers who will pay $300 for a ticket.There are 150 seats available on the plane.Suppose the cost to the airline of providing the flight is $20,000,which includes the cost of the pilots,flight attendants,fuel,etc.How much additional profit can the firm earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket?

Question

Quizplus · Accepted Answer

If the airline charges a flat price of $600 per ticket, they will earn $60,000 (100 x $600 + 50 x $300) in revenue. However, if they charge each customer their willingness to pay, they will earn $95,000 in revenue [(100 x $600) + (50 x $300)].

To calculate the profit from each scenario, we need to subtract the cost of providing the flight from the revenue earned.

If the airline charges a flat price of $600 per ticket, their profit will be $40,000 ($60,000 - $20,000).

If the airline charges each customer their willingness to pay, their profit will be $75,000 ($95,000 - $20,000).

Therefore, the additional profit the firm can earn by charging each customer their willingness to pay relative to charging a flat price of $600 per ticket is $15,000 ($75,000 - $40,000).

An Airline Knows That There Are Two Types of Travelers