Airlines offer frequent flyers different kinds of perks that we will model here as reductions in average prices per mile flown.
A:
Suppose that an airline charges 20 cents per mile flown. However, once a customer reaches 25,000 miles in a given year, the price drops to 10 cents per mile flown for each additional mile. The alternate way to travel is to drive by car which costs 16 cents per mile.
(a) Consider a consumer who has a travel budget of $10,000 per year, a budget which can be spent on the cost of getting to places as well as “other consumption” while traveling. On a graph with “miles flown” on the horizontal axis and “other consumption” on the vertical, illustrate the budget constraint for someone who only considers flying (and not driving) to travel destinations.
(b) On a similar graph with “miles driven” on the horizontal axis, illustrate the budget constraint for someone that considers only driving (and not flying) as a means of travel.
(c) By overlaying these two budget constraints (changing the good on the horizontal axis simply to “miles traveled”), can you explain how frequent flyer perks might persuade some to fly a lot more than they otherwise would?
B:
Determine where the air-travel budget from A(a) intersects the car budget from A (b).