Suppose the federal government truly believes that airfares are too high as a result of all the
Question:
Suppose the federal government truly believes that airfares are too high as a result of all the consolidation in the industry. Rather than break up the airlines, which would be politically impossible, they have decided to put a price ceiling on airfares. Suppose the demand for airfares is given by P = 500 - 10Q and the supply is P = 40Q, where Q is in millions of flights taken, and P is in dollars per flight. Answer the following questions to study this policy:
1. What is the equilibrium price and quantity of flights? At this equilibrium, find the amount of producer and consumer surplus.
2. Suppose the government puts a ceiling price of $300 per flight. What is the quantity demanded? What is the quantity supplied? Find the new amounts of consumer and producer surplus and calculate any deadweight loss relative to your answer in 1.
3. Is there a way an alternative market (think "black market") would arise to get around this price ceiling? What would the actual price be on this market?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta