An airline practices third-degree price discrimination. Each month, it sells 1,500 business-class tickets from London to Paris at $200 a ticket, and 6,000 economy-class tickets at $80 a ticket. Use this information to construct the demand curves of business travelers and tourists respectively, if it is given that the demand curves for both groups are linear and that the marginal cost of a ticket is constant at $50.

Answer:

As in third degree price DISCRIMINATION

At eqm , in each Market, MR = MC

so from MONOPOLY pricing decision in each Market

MC = P*(1- 1/e)

so, for business class

50= 200(1-1/e)

50= 200-200/e

200/e = 150

e = 200/150= 4/3

as e= (P/Q)*(dQ/dP)

dQ/dP = -(4/3)*(1500/200)

dQ/dP = -10

so Demand curve for business class:

Q-1500= -10*(P-200)

Q-1500= 2000-10P

10P = 3500-Q

P= 350-.1Q

P = 350-.1Q

.

• for Economy class :

50= 80*(1-1/e)

5= 8-8/e

8/e = 3

e = 8/3 = -(P/Q)*(dQ/dP)

dQ/dP =- (8/3)*(6000/80)

= -200

• Demand curve

Q-6000= -200(P-80)

Q-6000= -200P + 16,000

200P = 22,000-Q

P = 110-Q/200

P = 110 - Q/200