Question

A railroad which runs between two cities offers two products: passenger and freight service. The marginal cost of carrying an extra ton of freight is $0, and the marginal cost of carrying an extra passenger is $1. There are joint, fixed costs of $19,000 per day. There is no other competitor in this market. The daily demand for passenger service is with Qp the number of passengers and Pp the price of a two-way ticket. The daily demand for freight service is

Pp = 8 - 0.005Qp with Qp the number of passengers and Pp the price of a two-way ticket. The daily demand for freight service is Pf= 10-0.001Qf with Qf in tons and Pf the price per ton.
a. Currently, Pp $5 per passenger and P S8 per metric ton. Please calculate the railroad's revenues from passenger service and freight service, respectively. In addition, calculate the railroad's overall profit. b. A manager at the railroad argues that prices should be raised on both products to increase profit. Do you agree with the argument? What pricing would you recommend for each product?
c. Another manager argues that the firm can use price differentiation to improve profit. Please recommend a specific price differentiation scheme for the railroad's passenger and/or freight service, and explain how it will work. b. c.

Answer 1

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