Suppose there is only one airline that travels from one island to another. Assume that business travellers have a low elasticity of demand for air travel. Holiday travellers on the other hand are flexible and are sensitive to price. Price discrimination can occur because:
A) business travellers have to travel.
B) there is a monopoly.
C) of the difference between price elasticities.
D) there are no close substitutes.

Question

Quizplus · Accepted Answer

The difference between the price elasticities of business and holiday travellers allows the airline to charge a higher price to business travellers, who are less sensitive to price, and a lower price to holiday travellers, who are more sensitive to price. This allows the airline to increase the overall revenue and profits by capturing the consumer surplus from both types of travellers. The other options, such as A and D, are not necessarily linked to price discrimination, while B is a condition for a monopoly but doesn't necessarily explain price discrimination.

Suppose There Is Only One Airline That Travels from One