A monopolist airliner hires you as a manager. They have business travellers and tourists astwo types of customers, whose inverse demands are P = 100 – x and P = 80 – x respectively. Your boss is not very happy with the idea of reducing the price of business-class tickets, and is thinking about reducing the quality of the economy-class ticket instead. Suppose that the economy class ticket can be reduced to have a quality of x = 40. Find out the lump-sum price of economy class ticket PE that can extract the maximum consumer surplus from tourists. For simplicity,assume that there is no cost to provide x. Given PE, find out the maximum price that of the business-class ticket PB that can be charged without making the business travellers going for the economy-class tickets. Suppose that the profit of the monopoly is PB + Pe. By comparing the profits from reducing business-class ticket price versus reducing economy-class quality to x = 40 what would you recommend to your monopolist boss?

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