MT445-Managerial Economics

Assignment

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, Ohio 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 per
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


1.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.  How your work.

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 seats.
 
(3) Cross-price elasticity of demand for American’s economy class seats with respect to United’s price on the same route  


2. Are economy class tickets a normal or inferior good in the Chicago-Columbus market? Explain. 

3. How close a competitor/substitute does United appear to be in the Chicago-Columbus market? Explain.

4. 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 revenue and total costs if you change your price.)

5. 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.

6. You know from the readings on supply and demand that demand is made up of all of the determinants for which you have calculated elasticities (price, income, cross price for substitution).  Which factor is the most important in determining demand?  Explain how you arrived at that conclusion and why it might (or might not) make sense. 

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