MANAGERIAL ECONOMICS I
Problem 2 (30)
A market study was conducted in 2002 by several major U.S. airline companies to examine if they could reduce unrestricted business fares and maintain or increase revenues. Delta Airlines offered an unrestricted fare between New York and Las Vegas of $825, compared with its usual $2,200 fare, and found that it earned about the same revenue as it would have collected with the higher fare. Making similar changes on its routes from Chicago to Florida, Delta found that the new fare structure yielded less revenue but a more significant market share (customers). The new fare structure on the Florida, Dallas route resulted in higher revenue.
- What did these study results imply about business traveler price elasticity of demand on the New York - Las Vegas, Chicago - Florida, and Florida, Dallas routes for Delta Airlines?
- The expectation in the airline industry is that airline travel is sensitive to changes in overall economic activity. The income elasticity of airline travel is around +1.5, meaning that spending on airline travel will change more than proportionately when income goes either up or down. This helps the airline industry in periods of strong economic activity but can cause problems if the economy slows or moves toward a recession. How did these results in the market study differ from this expectation?
- What factors caused these differences?
Problem 3 (30)
The following graph represents Moon Handbags firm demand and average total cost which produces handbags in a perfectly competitive market:
- If the firm wants to maximize profit, how many handbags should it produce?
- What level of total revenue will the firm earn?
- Suppose the firm's manager decides to produce 100,000 output units. What would you tell him regarding his profit?
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