Airline managers estimate the relationship between air trave

Airline managers estimate the relationship between air travel demand (D) and price (p) as follows: D = 1,000 - 0.5p, where D is the number of seats.

The airline changes from the single-price strategy to a three-tier pricing strategy ($1,000 for 300 seats; $1,600 for 100 seats; $1,800 for 100 seats). Calculate the total revenue of the airline and the consumer surplus.

Solution

Relationship between air travel demand and price

D = 1000 - 0.5p

Taking price as $1000

D = 1000 - 0.5 *1000

= 1000 -500

=500

Taking p as $1600

D = 1000 - 0.5*1600

= 1000 - 800

= 200

Taking price as $1800

D = 1000 - 0.5*1800

= 1000 - 900

= 100

Total Revenue of the Airline at three -tier pricing strategy

$1000 * 300 + $1600 * 100 + $1800 * 100

= 300000 + 160000 + 180000

= $640000

Total revenue earned = $640000

Buyer is willing to pay $1000 for 500 seats.

Total Revenue = 1000 * 500 = $500000

Actual Price paid by the buyer = $640000

So Consumer Surplus = Amount the buyer is willing to pay - Actual amount paid by the buyer

$500000 - $640000

=-$140000