9781118041581

Summary 109

After writing down the price equations, deriving the associated marginal revenue

expressions, and equating them, we have:

which can be simplified to QB 40 QT. The maximum-revenue plan always allocates

40 more seats to business travelers than to pleasure travelers. Since the plane capacity is

180, sales are constrained by QBQT180. Therefore, the optimal quantities are

QB110 and QT70. Optimal prices are PB$220 and PT$180. In turn, if we sub-

stitute QB110 into the expression MRB 330 2QB, we find that MRB$110 per

additional seat. (Of course, MRTis also $110 per seat.) Finally, total revenue is computed

as R RBRT($220)(110) ($180)(70) $36,800. Recall that maximum revenue

under a single price system was $36,000. Optimal yield management (price discrimina-

tion) has squeezed an additional $800 out of passengers on the flight. As the chapter-

opening example suggests, additional revenue can be gained by increasing the number

of different fares, from 2 to as many as 12 or more.

330 2QB 250 2QT,

CHECK

STATION 6

Suppose the airline’s management is considering adding an extra flight every second

day. Therefore, average daily capacity would increase from 180 to 270 seats. The addi-

tional cost of offering this extra flight is estimated at $50 per seat. Show that adding

this “second-day” flight would be profitable but that an additional “everyday” flight

would not. Determine the new ticket prices for the two classes.

SUMMARY

Decision-Making Principles

1. Optimal managerial decisions depend on an analysis of demand.


2. In particular, the firm’s optimal uniform price is determined by the
   markup rule. This price depends on marginal cost and the price
   elasticity of demand.


3. Where the opportunity exists, the firm can increase its profit by
   practicing price discrimination.

Nuts and Bolts

1. The demand function shows, in equation form, the relationship between
   the unit sales of a good or service and one or more economic variables.
   a. The demand curve depicts the relationship between quantity and
   price. A change in price is represented by a movement along the

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