I have to write a 3-4 page paper on the following question but am having problems getting started. The question is as follows:
"I work for a small airline company. Our management has recently instituted a new ticket pricing policy. I must figure out how this policy will affect our future profit.
Here is our situation. Every flight costs us $2000 in salaries, fuel, landing fees, etc. Every passenger we carry costs us an extra $20 (peanuts,pop,and taxes). We presently charge $100 per ticket. My boss believes that the more we charge, the more profitable each flight will be. So starting today, we will increase our ticket price by $1 per day. (We can think of our cost as increasing continuously with time. The price of a ticket depends on the departure time of the flight, not the time when the ticket is bought.)
With a $100 ticket price, we geneerally fill 20 seats on every flight. But as we all know, as the price of a commodity goes up, the demand goes down. Experience has shown the when the price is $100 or more, we lose a customer every time the price goes up by $20. We can think of the number of seats sold as being a linear function of the price.
I believe that, for a short time, my oss will be correct: our profit per flight will increase. Howerver, I suspect that if this policy continues, the profit level of each flight will stop incrasing and start decreasing.
My question is: When will the profits stop increasing and start decreasing?"
I have been trying to create a demand equation for this and believe it would allow me to solve all the questions but am unsure how to go about doing so. Any help would be appreciated.
"I work for a small airline company. Our management has recently instituted a new ticket pricing policy. I must figure out how this policy will affect our future profit.
Here is our situation. Every flight costs us $2000 in salaries, fuel, landing fees, etc. Every passenger we carry costs us an extra $20 (peanuts,pop,and taxes). We presently charge $100 per ticket. My boss believes that the more we charge, the more profitable each flight will be. So starting today, we will increase our ticket price by $1 per day. (We can think of our cost as increasing continuously with time. The price of a ticket depends on the departure time of the flight, not the time when the ticket is bought.)
With a $100 ticket price, we geneerally fill 20 seats on every flight. But as we all know, as the price of a commodity goes up, the demand goes down. Experience has shown the when the price is $100 or more, we lose a customer every time the price goes up by $20. We can think of the number of seats sold as being a linear function of the price.
I believe that, for a short time, my oss will be correct: our profit per flight will increase. Howerver, I suspect that if this policy continues, the profit level of each flight will stop incrasing and start decreasing.
My question is: When will the profits stop increasing and start decreasing?"
I have been trying to create a demand equation for this and believe it would allow me to solve all the questions but am unsure how to go about doing so. Any help would be appreciated.