Suppose you are in charge of pricing for an airline. There are two types of customers: businesspeople and tourists. There are 100 customers of each type, and each customer buys at most one ticket. The table below shows the maximum they would pay ("willingness to pay") for each ticket type:
image source: Principles of Economics by John Newman 2009
A customer's payoff from buying a ticket is the difference between the consumer's willingness to pay and the price. Suppose that the marginal cost of both economy and first-class seats is zero.
a. If you could engage in first-degree price discrimination, which tickets would you sell to each consumer and how much would you charge? [7 points]
For the remainder of this question, suppose that you cannot tell who is a businessperson and who is a tourist.
b. What prices should you charge on economy and first-class seats to maximize profits? [7 points]
c. How would the optimal prices change if instead there were 150 businesspeople and 50 tourists? [7 points]
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