Consider the decisions of Virgin Galactic as it opens an exclusive line between earth and the moon. If Virgin Galactic is the sole airline operating...
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Consider the decisions of Virgin Galactic as it opens an exclusive

line between earth and the moon. If Virgin Galactic is the sole airline operating this line, it acts like a monopolist in this market. The demand for flights to the moon is segmented into two groups. Business travellers, who often have to buy last minute tickets, have a demand function given by P = 100 − 2Q. Families going on vacation, who can plan ahead, have a demand given by P = 100 − Q. Although Richard Branson (the founder of Virgin Galactic) had to pay billions of pounds to build the Virgin Galactic ship, by using renewable energy he cut his marginal cost to zero. a) Assume first that Virgin Galactic is allowed to charge different prices to these different groups (for example, it can charge a different price if you purchase the ticket a few months in advance than if you purchase the ticket last minute). Calculate the monopoly prices charged for each group, the profit of Virgin Galactic, and the total consumer surplus in the whole market. The government is concerned about the monopoly power of Virgin Galactic. To measure the "social cost" of Virgin Galactic pricing strategy you calculated in (a), the government compares the total surplus you found in (a) to the total surplus that would arise if Virgin Galactic would charge prices as if it was in a competitive equilibrium. b) As a first step to help the government's calculation, compute the total demand for flights in the market. c) With the total demand you have calculated above, calculate the price, the producer surplus, and the consumer surplus that would arise if this was a perfectly competitive market. To get the government measure of the "social cost" of Virgin Galactic pricing strategy, calculate the difference between the total surplus in the perfectly competitive market, and the total surplus you have computed in (a). d) As a first step to reduce the "social cost" of Virgin Galactic pricing strategy, the government prevents Virgin Galactic from price discriminating by forcing Virgin Galactic to charge only one price for everyone. Calculate the new price, the new profits for Virgin Galactic and the new total surplus. Calculate the "social cost" of Virgin Galactic pricing strategy when it cannot price discriminate. Is this step taken by the government effective?

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