Consumer Behavior and Elasticities
economics
Description
Consumer Behavior and
Elasticities
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 |
United’s |
Monthly per |
American’s |
United’s |
|
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 |
|
|
(2) Income elasticity of demand for American’s |
|
|
(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. This means
that if own price changes, income and price of competitor stay the same.
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. The quantity is always the change in American’s load
factor. The “price” is the price of American’s tickets, or the income, or
the price of United’s tickets.
2. 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.)
3. 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.
