A single airline services the market for a given destination in a linear city (i.e. uniform...

 

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A single airline services the market for a given destination in a linear city (i.e. uniform distribution in [0, 1]) through an airport that is located at the center of the city. Costumers have valuation v and unit demand so that net surplus u for a costumer located at x is u=v-tx- - P 2 where p is price. a. Assuming v = t = 1 and the marginal cost is 0.1 find the optimal monopoly price. b. A new airline offers service from a new (less congested) airport located at one extreme. Assuming this airline has lower marginal cost (i.e. 0.05), find equilibrium prices. Com- pare with (a). A single airline services the market for a given destination in a linear city (i.e. uniform distribution in [0, 1]) through an airport that is located at the center of the city. Costumers have valuation v and unit demand so that net surplus u for a costumer located at x is u=v-tx- - P 2 where p is price. a. Assuming v = t = 1 and the marginal cost is 0.1 find the optimal monopoly price. b. A new airline offers service from a new (less congested) airport located at one extreme. Assuming this airline has lower marginal cost (i.e. 0.05), find equilibrium prices. Com- pare with (a).

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