1.6. Elizabeth Airlines (EA) flies only one route: Chicago–Honolulu. The demand for each flight is Q = 500 − P. EA’s cost of running each flight is

$30,000 plus $100 per passenger.

a. What is the profit-maximizing price that EA will charge? How many people will be on each flight? What is EA’s profit for each flight?

b. EA learns that the fixed costs per flight are in fact $41,000 instead of $30,000. Will the airline stay in business for long? Illustrate your answer using a graph of the demand curve that EA faces, EA’s average cost curve when fixed costs are $30,000, and EA’s average cost curve when fixed costs are $41,000.

c. Wait! EA finds out that two different types of people fly to Honolulu. Type A consists of business people with a demand of QA = 260 − 0.4P.

Type B consists of students whose total demand is QB = 240 − 0.6P. Because the students are easy to spot, EA decides to charge them different prices. Graph each of these demand curves and their horizontal sum. What price does EA charge the students? What price does it charge other customers? How many of each type are on each flight?

d. What would EA’s profit be for each flight? Would the airline stay in business? Calculate the consumer surplus of each consumer group.

What is the total consumer surplus?

e. Before EA started price discriminating, how much consumer surplus was the Type A demand getting from air travel to Honolulu? Type B?

Why did total consumer surplus decline with price discrimination, even though total quantity sold remained unchanged?