It would be very expensive to fly a passenger aircraft from Boston to Paris. Once the plane
Question:
It would be very expensive to fly a passenger aircraft from Boston to Paris. Once the plane is purchased, staffed, fueled, additional passengers can be accommodated relatively cheaply.
a) You have been hired by Air France to recommend pricing and marketing strategies for its Boston to Paris flight. On one graph: Draw a hypothetical Average Total Cost (ATC) curve, the Marginal Cost curve, and a Demand (MU) curve for flying to Paris. (Hint: The point where Demand intersects MC should be below the ATC curve.)
b) Show the area of net profit (or loss) under perfect competition for the Paris flight as the difference between average total cost and the average revenue (or the price). (Note Air France’s profit is the number of tickets times the average price minus ATC.)
c) What will happen to the flight another airline (such as Lufthansa) starts flying from Boston to Paris? What will happen when a large number of new flights are established? What happens to the industry and the number of companies under competitive conditions? Why?
d) Duplicate the ATC, MC, & MU graph from part b, but this time, show what happens if Air France can work with the other airlines to establish a monopoly price. Show the area of net profit as the difference between average total cost and the price multiplied by the number of tickets (Profit = (P – ATC)*Q). How does this change consumer, producer, and total surplus?
e) Discuss at least three strategies Air France could follow to give it more monopoly power and allow it to raise prices even without collusion with Lufthansa and the others.