CFA Practice Question

There are 539 practice questions for this study session.

CFA Practice Question

An airline initially has a single price of $200 for all consumers. At this price, it sells 400 business tickets and 700 tourist tickets. The airline's marginal cost is $50. The slope of the business demand curve is 2.0 (in absolute value) and the slope of the tourist demand curve is 0.1 (in absolute value). How can the airline increase its profits, assuming that it can separate the market and prevent resale?
A. Charge a higher price to tourists and a lower price to business customers.
B. Charge a lower price to tourists and a higher price to business customers.
C. Charge the same price to business customers and a lower price to tourists.
Explanation: Business: MR = 200 - (2*400) = -600 < MC. Tourist: MR = 200 - (.1 * 700) = 130 > MC. The airline should increase the price to business customers and reduce the price to tourists.

User Contributed Comments 10

User Comment
cbb1 From this info, can you compute the price of the tickets for business and tourist? Is the price for business tickets $850 and tourist tickets $120 to maximize MR=MC?
chuong Remember that elasticity is not the slope of the demand curve
labsbamb If business price is 850
we have MR1: 850- (2*400)= 50
For tourist price =120
we have MR2:120 - 700*0.1) =50
MR1=MR2=MC
jerylewis It seems elasticity is the inverse of the slope
* slope = y/x
* elasticity = change in x / change in y = change in Q / change in Price
am I right?
Thecatz no
aqibislam What is the relation between elasticity and slope? Can anyone please explain?
Leonie Change in price = (p1-p0)/((p1+p0)/2) same for quantity. This is very important, this is NOT the slope, nor the inverse. There is no relationship and it is very important to remember this straight from the beginning.
Roberto88 If E=slope x price / quantity.
Then E of tourists = 0.1x200/700 = 2/70=0.0286
and E of business = 2x200/400 = 1, unit elastic
MR tourists = price (1- 1/E) = 130
MR business = 0
Still the solution is the same, decrease for tourists and increase for business, but
isn't the MR business wrongly calculated??
kingirm From the data we can infer that the price elasticity is less with the tourists. So charge them higher and charge business clients less. ;))
marta4100 can someone please explain???
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