Question

Grand River Transit has a cash fare policy of charging a single price ($3.25) to all travelers despite the existence of identifiable groups (students, seniors) that have different willingness and ability to pay for public transportation. Draw and explain an appropriate model(s) that illustrates why this policy deviates from the pricing strategy a profit-maximizing company would implement.

Answer 1

Currently, there is a cash fare policy of charging a single price ($3.25) to all travelers. This is shown in part a) where a single price of p1 = 3.25 and thus a total of q1 tickets are sold. There is a profit shaded by yellow but this profit can be increased if multiple prices are charged

In part b) two groups are considered, students and non-students. To both of them, there are different prices charged at p1 and p2 because of the existence of identifiable groups having different willingness and ability to pay for public transportation. Under this case, profit is increased as the authority is now supplying to two different consumer groups by charging different prices.