Question

Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should A. decrease the price charged to vacationers and increase the price charged to business travelers. B. decrease the price to both groups of customers. C. increase the price charged to vacationers and decrease the price charged to business travelers. D. increase the price for both groups of customers.

Answer 1

Answer: If the airline's objective is to increase total revenue, it should decrease the price charged to vacationers and increase the price charged to business travelers.

Explanation:

Here the objective of the airline is to increase total revenue,  therefore airline should practice price discrimination i.e. charge different prices to vacation travelers and business travelers.

Since customers traveling for vacations have elastic demand i.e. ε > 1 , so if airline reduces the price of air ticket for them, then there will be a percentage decrease in the price that will be less then the percentage increase in the number of vacation travelers.

Therefore, total revenue will increase with decreasing price charged to vacationers.

Whereas;

The demand of business travelers is inelastic  i.e. ε < 1, so if airline increases the price of air ticket for business travelers, then there will be a percentage increase in the price that will be more then the percentage decrease in the number of vacation travelers

Therefore, total revenue will increase with increasing price charged to business travelers.