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ECON Quantitative Analysis

VietJet is a Vietnamese low-cost airline. Its total annual demand is given by the equation Q = 1200 - 8P. Demand is higher in the peak season (Q = 640 - 3P) than the off-peak season (Q = 560 - 5P). Charging a single price leads to a loss, while charging different prices in each season leads to a maximum profit. The demand elasticity during the peak season is -3.57, showing demand is elastic. Charging different prices allows VietJet to maximize profits by accounting for seasonal variations in demand.

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43 views2 pages

ECON Quantitative Analysis

VietJet is a Vietnamese low-cost airline. Its total annual demand is given by the equation Q = 1200 - 8P. Demand is higher in the peak season (Q = 640 - 3P) than the off-peak season (Q = 560 - 5P). Charging a single price leads to a loss, while charging different prices in each season leads to a maximum profit. The demand elasticity during the peak season is -3.57, showing demand is elastic. Charging different prices allows VietJet to maximize profits by accounting for seasonal variations in demand.

Uploaded by

Lena Phan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Case 3:

VietJet is an international low-cost airline from Vietnam. As a low-cost carrier, VietJet offers the
different fares based on seasonal demands in order to maximize their profit and hence the fares
vary as per the demand during peak and off-peak season. The airline’s total demand is given by;
Q = 1200 – 8P, where Q is the number of passengers (in thousands) per year and P is the fare in
US dollars. The demand in the peak season is given by; Q = 640 – 3P and this demand function
is different in off-peak season which is given by; Q = 560 – 5P. Assume that the fixed cost is $12
million per year with a constant marginal cost of $120 per passenger. Based on this information,
discuss the below parts:

a) Calculate the maximum profit, price and number of passengers given that the airline charges
only one prices irrespective of the season.
b) Calculate the maximum profit, price and number of passengers given that the airline charges
different prices based on the season.
c) Calculate and comment on the demand elasticities at the price where they get maximum
profit based on your answer in part (b) above.
d) Why do you think the airline would like to charge the different prices in different seasons?
What benefits can it bring to the VietJet by doing so? Explain.

Answer:
e) Total demand is given by equation:
Q = 1200 – 8P ↔ P = 150 – 0.125Q
Total revenue = P * Q = 150Q – 0.125Q2
Profit π = Total Revenue – Fixed Cost – Variable Cost
= 150 Q – 0.125Q2 – 12,000,000 – 120Q
First order derivative:
π'=150 - 2*0.125Q – 120 = 0 ↔ Q=120
Second order derivative:
π” = -0.25 < 0 so this is a maximum point
So number of passenger is 120,000.
Ticket price: P = 150 – 0.125*120 = $135
Profit = P*Q – 12,000,000 – 120Q = 135*120,000 –12,000,000 – 120*120,000 = -
$10,200,000
f) Given that the airline changes prices based on the season:
Peak season:
Q = 640 – 3P => P = (640 – Q)/3
Total revenue = P * Q = (640Q – Q2)/3
Profit π = Total Revenue – Fixed Cost – Variable Cost
= (640Q – Q2)/3 – Fixed Cost – 120Q
First order derivative:
π'=(640 - 2Q)/3 – 120 = 0 ↔ Q=140
Second order derivative:
π” = -0.66 < 0 so this is a maximum point
So number of passenger is 140,000.
Ticket price: P = (640 – 140)/3= $166.67
Off- season:
Q = 560 – 5P => P = 112 – 0.2Q
Total revenue = P * Q = 112Q – 0.2Q2
Profit π = Total Revenue – Fixed Cost – Variable Cost
= 112Q – 0.2Q2 – Fixed Cost – 120Q
First order derivative:
π'=112 - 2*0.2Q – 120 = 0 ↔ Q=-20
Second order derivative:
π” = -0.4 < 0 so this is a maximum point
So number of passenger is -20,000.
Ticket price: P = 112 – 0.2*(-20) = $116
Total profit = Revenuepeak + Revenueoff – Fixed Cost – Variable cost
¿ P peak Q peak + Poff Q off −12000000−120 ( Q peak +Qoff )
¿ 166.67∗140000+116∗(−20000)−12000000−120 ( 140000−20000 )
¿−5,386,200
g) The maximum profit that the airline get is from peak season, where demand function is:
dQ
Q = 640 – 3P ⇒ =−3
dP
Maximum profit during peak season is achieved when P=$166.67 and Q = 140, so demand
elasticity is given by:
dQ
∗P
dP (−3 )∗166.67
ε d= = =−3.57
Q 140
Absolute value of demand elasticity is higher than 1, thus demand is elastic during peak
season.
h) Vietjet should apply different prices in different seasons because under the two price
strategy, profit earned during the year exceed profit earned if the firm apply only one price
throughout the year.

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