# ps10ans - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005...

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UNIVERSITY OF WISCONSIN Economics 101 – Fall 2005 Wei Zhang Problem Set 10 – ANSWER KEY Price Discrimination (cont'd) 1. a) A perfect price discriminating airline will charge the two types of passengers their willingness to pay for each type of tickets if they have to offer both types of tickets. Since the airline flies without cost, it will choose to offer only unrestricted tickets by \$1000 and \$400 for business travelers and leisure travelers if the company does not have to offer both types of tickets. b) When the airline cannot distinguish the travelers, it must set the same price for everyone. Let P u and P r denote the prices of unrestricted and restricted tickets. If only unrestricted tickets are offered, any P u <= 400 will have both types of passengers purchasing the tickets and if 1000>=P u >400 only business type will buy. Price above 1000 does not sell. So if the airline wants both types of passengers to buy, the best price is to set P u = 400 and earn 800 in total (by the assumption that each type of travelers accounts for 50 percent of the population, we can just think of the consumer pool as 1 business traveler and 1 leisure traveler.) But if the company opts for only selling to the business type it can set P u = 1000 and earns 1000. So the best price to set is P u = 1000. When the airline only offers restricted ticket, by the same reasoning above, the airline can choose to sell at 600 to only the business traveler and earns 600, or set P r =350 and sell to both travelers and earn 700 in total. In this case the optimal price is P r =350. c) (This part is challenging.) Again let P u and P r denote the prices of unrestricted and restricted tickets. First we have to know the choice of types of tickets as the result of a pair of (P

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## This note was uploaded on 07/28/2010 for the course ECON 101 taught by Professor Hansen during the Fall '07 term at University of Wisconsin.

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ps10ans - UNIVERSITY OF WISCONSIN Economics 101 Fall 2005...

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