Chapter 18, Problem 1DQ

To determine

Whether the higher fare from first class passengers and lower fare from the coach passenger is a type of price discrimination.

Explanation of Solution

• No, the practice of airlines to charge higher fare from the first class passengers while lower fares from the coach passengers is not a type of price discrimination.

• This is because all first class passengers get more facilities, so as compare to the passengers in general coaches. The first class passengers have spacious and comfortable seats as compared to the seats of the coach passengers.

• They also get free services like meals, blankets, attendants, and better security. The differences in the fare cannot be considered as price discrimination because the marginal cost associated with the facilities given to the first class passengers is very much higher than the marginal cost associated with the passengers of the general coaches.

• Therefore, it is not suitable and apt to say that higher prices charged from first class passengers as compared to the coach passengers is a type of price discrimination.

Economics Concept Introduction

Concept introduction:

Price discrimination:

When different prices are charged from different people for the same good, then it is referred to as price discrimination. It is generally practiced in a monopoly market. Example: Senior citizens are charged less for tickets in rail transportation than normal people.

• The main objective of price discrimination is to maximize profit. Prices are charged differently because different people have different elasticity of income. For example, senior citizens have higher elasticity of income, so they are charged less.

• On the other hand, businessmen have lower elasticity of income, so they are charged more. It occurs when marginal costs are equal among all customers but prices are equal in spite variation in the marginal costs.