Microeconomics
5th Edition
ISBN: 9781118572276
Author: David Besanko
Publisher: WILEY
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Question
Chapter 2, Problem 2.21P
To determine
(a)
To calculate
To determine
(b)
To calculate price elasticity of demand for air travel between Chicago and Dallas when both airlines charges a price of $300
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Suppose that the market for air travel between Chicago and Dallas isserved by just airlines, United and American. An economist has studied thismarket and has estimated that the demand curves for round-trip tickets foreach airline are as follows:QdU = 10,000 - 100PU + 99PA (United’s demand)QdA = 10,000 - 100PA + 99PU (American’s demand) where PU is the pricecharged by United, and PA is the price charged by American.a. Suppose that both American and United charge a price of $300 each for around-trip ticket between Chicago and Dallas. What is the price elasticityof demand for United flights between Chicago and Dallas?b. What is the market-level price elasticity of demand for air travel betweenChicago and Dallas when both airlines charge a price of $300? (Hint:Because United and American are the only two airlines serving theChicago–Dallas market, what is the equation for the total demand for airtravel between Chicago and Dallas, assuming that the airlines charge thesame price?)
Shell has over 13,000 gas stations in the United States. In addition to gasoline, the gas stations also sell convenience items, such as snacks, non-alcoholic beverages, wine, beer, and hot food. Suppose you work for a gas station and your boss asks you to develop a pricing strategy for bottled local wine. The demand function is ? = 100 – 4?, where ? is the monthly quantity demanded of the bottled wine and ? is the price of the bottled wine. The marginal cost per bottle of wine is $5. Complete the following tasks:
1) (Calculating) In the worksheet “Q2 Calculations” of the provided Excel file, enter formulas in columns B-D to calculate Q (quantity demanded), MC (marginal cost), and MR (marginal revenue). Please round your results to one decimal place. Note that the inverse demand function is ? = 25 − 0.25? and that the MR function can be derived from the inverse demand function using the formula introduced in Module 5. You may find it helpful to review the Excel file for Chapter 11.
Imagine you work as an economist for a particular airline (A). Your job entails estimating the passenger demand for airline travel provided by A. Accordingly, you estimate the following:
Price elasticity of demand for A’s service = 3
Cross elasticity of demand for A’s service (with respect to airline B’s price) = 2
Income elasticity of demand for A’s service = 1
Making sure to show all of your work, if consumer income falls by 5% (due to a recession), and at the same time airline B lowers its price by 10%, all else equal, what would you specifically recommend A due to its price to maintain its quantity of passengers (i.e., lower or raise its price and by what percent)? Hint: Elasticities are ratios of percentage changes.
Chapter 2 Solutions
Microeconomics
Ch. 2 - Prob. 1RECh. 2 - Prob. 2RECh. 2 - Prob. 3RECh. 2 - Prob. 4RECh. 2 - Prob. 5RECh. 2 - Prob. 6RECh. 2 - Prob. 7RECh. 2 - Prob. 8RECh. 2 - Prob. 9RECh. 2 - Prob. 10RE
Ch. 2 - Prob. 2.1PCh. 2 - Prob. 2.2PCh. 2 - Prob. 2.3PCh. 2 - Prob. 2.4PCh. 2 - Prob. 2.5PCh. 2 - Prob. 2.6PCh. 2 - Prob. 2.7PCh. 2 - Prob. 2.8PCh. 2 - Prob. 2.9PCh. 2 - Prob. 2.10PCh. 2 - Prob. 2.11PCh. 2 - Prob. 2.12PCh. 2 - Prob. 2.13PCh. 2 - Prob. 2.14PCh. 2 - Prob. 2.15PCh. 2 - Prob. 2.16PCh. 2 - Prob. 2.17PCh. 2 - Prob. 2.18PCh. 2 - Prob. 2.19PCh. 2 - Prob. 2.20PCh. 2 - Prob. 2.21PCh. 2 - Prob. 2.22PCh. 2 - Prob. 2.23PCh. 2 - Prob. 2.24PCh. 2 - Prob. 2.25PCh. 2 - Prob. 2.26PCh. 2 - Prob. 2.27PCh. 2 - Prob. 2.28PCh. 2 - Prob. 2.29PCh. 2 - Prob. 2.30P
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