Question

On a popular air route, an airline offers two classes of service: business class (B) and economy class (E). The respective inverse demands are given by P B = 540 - 0.5Q B and P E = 380 - Q E .

Because of ticketing regulations, business passengers cannot take advantage of economy’s low fares. Each flight has a capacity of 200 passengers, The cost per full flight is $20,000, so you may assume the marginal cost per passenger is $100.

Because of regulations, the airline has to operate two flights daily.

10. Write down the optimization problem faced by this firm as a constrained optimization problem with two variables.

11. Write down the first order condition(s).

12. What fares should the airline charge, and how many passengers will buy tickets of each type?

13. Write down the second order condition(s) and check whether it/they is/are satisfied.

Answer 1