Antigua Air flies only one route: Miami to the V.C. Bird International Airport on the island of
Antigua, Due to current travel restrictions, AA is the only airline delivering and returning
passengers to the island. The demand for each flight is Q= 1,000 -2P. Q is the number of
passengers flying AA weekly and P is the price of a one-way ticket in either direction. AA's
weekly costs of running each flight is $75,000 (terminal fees, aircraft docking fees, etc.) plus
$100 per passenger per flight.
A) What is the profit-maximizing price that AA will charge? How many people will in fly each
week? What is AA's profit per week?
B)
AA learns that the fixed costs per week are in fact $82,000 instead of $75,000 as the result of an increase in terminal fees at both the Miami and V.C. Bird airports. How will AA react to the increase in fixed cost? Will the airline stay in business for long?
C)
Wait! AA determines that two different types of people fly to and from the island, Type A
consists of older more affluent travelers with a demand of Qa= 600 - P, Type B consists of
students whose total demand is Qb= 400 -P. Because the students are easy to identify by
checking for a student ID, AA decides to charge them a different discounted price, What price does AA charge the students? What price does it charge other custorners? How many of each type are on the flight each week?
D)
What would AA weekly profits be now? Would the airline now stay in business?
E)
Calculate the consumer surplus of each consumer group under price discrimination. What isthe total consumer surplus?
F)
Before AA started price discriminating, how much consumer surplus was the Type A demand getting from air travel to and from the island? What about Type B? Why did total consumer surplus decline with price discrimination, even though the total quantity of tickets sold remained unchanged?