Question: Northern Airways is about to introduce a daily round trip flight

Northern Airways is about to introduce a daily round-trip flight from New York to Los Angeles and is determining how to price its round-trip tickets.
The market research group at Northern Airways segments the market into business and pleasure travelers. It provides the following information on the effects of two different prices on the number of seats expected to be sold and the variable cost per ticket, including the commission paid to travel agents:

Pleasure travelers start their travel during one week, spend at least one weekend at their destination, and return the following week or thereafter. Business travelers usually start and complete their travel within the same work week. They do not stay over weekends. Assume that round-trip fuel costs are fixed costs of $ 24,700 and that fixed costs allocated to the round-trip flight for airplane-lease costs, ground services, and flight-crew salaries total $ 183,000.

1. If you could charge different prices to business travelers and pleasure travelers, would you? Show your computations.
2. Explain the key factor (or factors) for your answer in requirement 1.
3. How might Northern Airways implement price discrimination? That is, what plan could the airline formulate so that business travelers and pleasure travelers each pay the price the airlinedesires?
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  • CreatedMay 14, 2014
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