In year 2000, Air France, the flag carrier of France, is a monopolist in the French domestic market. The daily demand for flights between

Paris (the capital) and Marseilles (2nd largest city) is Pd = 50 - Q/20 where P is the price of a ticket in Euros and Q is the number of

passengers per day.

Air France has a daily total cost of flying between Paris and Marseille equal to TC = 10Q + 2,000 and a MC = 10.

a. Using the MR = MC condition, find Air France's profit maximizing number of passengers (profit maximizing quantity) and profit

maximizing price. Then, in a diagram, illustrate Air France's demand, marginal revenue, marginal cost and the profit maximizing price and

quantity.

b. Compute Air France's profit from flying passengers between Paris and Marseille.

c. In words, explain why the number of passengers Air France should fly to maximize profit is inefficiently small. How can you evaluate the

extent of this inefficiency?

In the market for flights connecting Paris to London, instead, Air France must compete against British Airways.

The overall demand for flights over this tract is also P = 50 - Q/20 where now Q = QA + QB is the sum of the passengers flying with Air

France (QA) and the passengers flying with British Airways (QB).

Air France's total cost of flying between Paris and London is TCA = 10QA + 2,000; British Airways' total cost is TCB = 5QB + 3,500.

The two carriers have to simultaneously decide whether to fly 200 or 300 passengers each day. Their strategic interaction is summarized by

the game in normal form below.

d. Using the information about demand in this market and the firm's respective total cost, fill in the missing information about the firms'

profits when they both fly 300 passengers. Keep in mind that the two firms have different cost functions and their payoffs are not symmetric.

British Airways

200 300

Air France

200

$1,500 profit $4,000 profit

$2,000 profit $1,000 profit

300

$500 profit $1,000 profit

$3,500 profit $ profit

e. In this game, does British Airways have a dominant strategy? Clearly explain.

f. Find the Nash equilibrium(s) of this game. At the Nash equilibrium(s), what is Air France's profit? What is British Airways' profit?

g. In this game, does British Airways have an advantage at moving first, so that Air France chooses how many passengers to fly after learning

what British Airways has chosen? Clearly explain.

h. Given the analysis from the previous parts, what would be the gain in consumer surplus and what would be the loss in Air France's profit

if the French government allowed a company like British Airways to enter the market for flights between Paris and Marseille? (you can

assume that BA would have a total cost of TCB = 5QB + 3,500).