An airline with monopoly power has daily flight service from Dallas to Denver, and has two different
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Question:
- An airline with monopoly power has daily flight service from Dallas to Denver, and has two different consumer groups with the following demands:
- P = 800 - q
- P = 500 - 0.5q
Costs for the airline are MC=AC=80.
- Suppose the airline wishes to price discriminate across demand types. Calculate the profit-maximizing price per round to each group. What are profits from each group? Show the situation on two graphs (one for each group).
- Calculate the point elasticity of demand at the chosen price for each group, and also the Lerner Index. If group 1 is mainly business travelers and group 2 is mainly vacationers, describe the requirements to effectively price discriminate.
- What is the CS and DWL in each market?
- Suppose that instead of a monopoly, the airline is competing with a rival in Cournot quantity competition. Calculate the Cournot price and quantity in each market and compare to the monopoly outcome.
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