An Executive,a Surfer,and a Schoolteacher Each Decide to Fly from Atlanta,Georgia,to

question 108

Multiple Choice

An executive,a surfer,and a schoolteacher each decide to fly from Atlanta,Georgia,to Honolulu,Hawaii.The schoolteacher can travel only during the months of June and July.The executive must travel in May for a meeting with her overseas board of directors.The surfer can travel anytime during the calendar year,but he faces a limited budget.The lowest airfare for each month is summarized in the following table.Assuming that the airline faces a constant cost of production each month for a flight,why is it beneficial for the airline to charge different prices each month?

• A) The airline wants to attract more business executives as customers.
• B) Because the airline is able to separate its customers into distinct groups-those who must travel during the summer months and those who can travel any time of the year-it is able to price discriminate and enjoy higher profits.
• C) The airline wants to restrict the number of customers who fly on a limited budget because it makes less profit on those ticket sales.
• D) Many schoolteachers travel with their families,so airlines prefer to make ticket prices reasonable for them.
• E) Because surfers often travel with oversized luggage,airlines want to make ticket prices attractive to these customers so that the airline can claim the extra baggage fees.

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Definitions:

Diminishing Returns

Diminishing returns is an economic principle stating that as investment in a particular area increases, the rate of profit from that investment, after a certain point, cannot continue to increase if other variables remain constant.

Diseconomies of Scale

The point at which a company or business grows so large that the costs per unit increase, leading to inefficiency and increased production costs.

Economies of Scale

Cost benefits that organizations acquire by scaling up their operations, wherein the cost for each unit produced tends to fall as the scale of operation enlarges.