detailed question is below on airline elasticity-due 11/7/2010 by 3 P.M today pls?
AAirline Elasticity Do calculations. dnt research the airline industry PART 1 1.As the Midwest regional manager for American Airlines, you have recently undertaken a survey of economy-class load factors (the percentage of economy-class seats that are filled with paying customers) on the Chicago-Columbus route that you service. The survey was conducted over 5 successive months. The survey results appear in the table below. Assume that all other factors have remained constant over the 5-month period: Month American’s Price United’s Price Monthly/ Capita Income American’s Load Factor (Q) United’s Load Factor (Q) 1 $110 $112 $1,900 65 60 2 110 110 1,900 62 63 3 110 110 2,100 70 66 4 109 110 1,900 70 61 5 108 110 1,900 72 59 2.Based on the data you have collected, how responsive is your company’s load factor on the Chicago-Columbus route to your own price, income levels, and United’s price? Select appropriate months and compute elasticity values to complete the following table. Elasticity (arc) Value (1) own-price elasticity of demand for American’s economy-class seats (2) income elasticity of demand for American’s economy-class seat (3) cross-price elasticity of demand for American’s economy-class seats with respect to United’s price on the same route Hint: Elasticity here is based on ceteris paribus conditions – all other things unchanged. In fact, there should be only one pair of consecutive months that meet the “all other things unchanged†criterion for each elasticity coefficient to be calculated, and it is a different pair of months for each one. Arc or midpoint elasticity formula appears in your text. The formula is the same for all three calculations. The quantity is always the change in American’s load factor. The “price†is the price of American’s tickets (own-price elasticity), or the income (income elasticity), or the price of United’s tickets (cross-price elasticity). Questions: a.Are economy-class tickets a normal or inferior good in the Chicago-Columbus market? Explain. b.How close a competitor/substitute does United appear to be in the Chicago-Columbus market? Explain. c.Based on the survey you have undertaken, to increase your profits, should you raise your price, lower it, leave it unchanged, or is it impossible to tell without more information? (Hint: consider what will happen to total revenues (TR) and total costs (TC) if you change your price.) d.If you had conducted your survey over a period of 5 successive years, rather than over 5 successive months, would the own-price elasticity of demand for your product be larger or smaller than your estimate here? Explain. e.Now, assume that American’s own price elasticity of demand that you calculated holds true for even lower prices (in other words, assume elasticity is linear). The plane used on these flights has 310 seats. A load factor of 70 means 70% of the seats are filled. A load factor of 72 means 72% of the seats are filled. What price would it take to fill all seats? (As you do your calculations, differentiate between percent and percentage points.) PART 2 1. Additional data: •Use same assumptions and figures calculated above. The plane used on these flights has 310 seats. A load factor of 70 means 70% of the seats are filled. A load factor of 72 means 72% of the seats are filled. •Fixed costs per flight between the two cities are $20,000 per flight. •Average variable costs for a flight with 70% load factor are $10 per passenger. (Note: while fuel consumption with one passenger is infinitesimally more than for none, it does take more fuel to fly with half a load than with none, and more fuel for a full load than with half.) Marginal costs for adding passengers between 70% load factor and 100% load factor are $11 for each passenger. 2. Questions: To increase profits, what should American do? Use the same pair of observations you used to calculate own-price elasticity of demand for your price and load-factor data. a.What would be American’s profit if the price were reduced to fill the plane as you calculated in part f above? b.How much can prices fall before American should either not cut them any more or not fly? (I can think of four answers to this question, one of which was contributed by students.) c.What if putting price at the level you calculated in part f above causes sufficient demand that another flight could go, but about half full? What would you do with pricing then? d.OK, now you get to consider what United would do. What would they do? How would that affect your decisions? PART 3 Now, apply some of these lessons to your own firm or industry. You may be able to make good guesses from your current experience. If not, this is a great time to meet some of the accounting people and learn more about the organization, the products, and the challenges and opportunities. This portion does not require hard numbers.
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This exercise is designed for you to spend a relatively long period of time demonstrating your understanding of the concept of elasticity. It cannot be answered without spending a considerable amount of time performing calculations, etc. For these reasons, it would be unfair for you to expect someone to to all of the work for you with an answer here. That would not help you learn, and someone else will end up doing a lot of work just to keep you from doing your own. If you need some help with getting started, and with understanding what the questions are asking for, I can help you with that. First of all, I will invite you to visit the pages in my website that cover the elasticity topics. http://economicsonlinetutor.com/Elasticity.html This should help you to understand what you need to know to answer the questions. Some hints to get you started: Make sure you use the midpoint formula. My website explains how to do that. When figuring the 3 types of elasticity, make sure, for each one, that you only use the consecutive months where factors that change the other 2 types do not change. That would be: own price elasticity, use 4 and 5 income elasticity, use 2 and 3 cross-price elasticity, use 1 and 2 For part 1: (a) a normal good would have a negative own-price elasticity; an inferior good would have a positive one. (b) a close substitute would have a cross-price elasticity greater than 1 (c) my website has a detailed explanation of the relationship between elasticity and TR (d) elasticities of all types always increase over time; elasticity measures responsiveness, time increases the ability to respond. That's as far as I am willing to go to get you started. Good luck on this. It requires you to spend your own time working on it. Since you have a short deadline for finishing this, then either your instructor expects you to already understand all of this very well before starting, or it was given to you much sooner than the time you posted it on here asking for help.
