As a 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 five successive months. For each month, data collected include the one-way fare you charge per economy seat, the price charged by rival United Airlines, the average (monthly) per capita income in the combined Chicago–Columbus market, and the average economy-class load factor for both American and United Airlines. Assume that all other factors (the price charged by Southwest Airlines, the number of flights, the size of planes flown, and so on) have remained constant.

a. On the Chicago–Columbus route, identify the arc price elasticity of demand for American economy seats, the arc income elasticity of demand for American economy seats, and the arc cross-price elasticity of demand for American economy seats with respect to United prices.
b. Based on the data that you have collected, is United a substitute or complement for American in the Chicago–Columbus market? Explain.
c. Are American’s economy seats a normal or inferior good in the Chicago– Columbus market? Explain.
d. Would the estimated demand elasticity for your product be larger or smaller if consumers had been given more time to respond to any price change (for example, one year versus one month)?
e. Compared with the price elasticity of demand for United and American, is the demand elasticity for economy seats in general in the Chicago–Columbus market (regardless of which airline provides them) larger or smaller?Explain.

  • CreatedNovember 14, 2014
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