1. Suppose that the annual growth in real income in Japan is expected to be between 2 and 3 percent and that income elasticity of demand for housing in Tokyo is estimated to be between 0.8 and 1.0 for rental units and between 0.7 and 1.5 for owner-occupied housing.
Questions:
a. What will be the growth in demand for rental units over the next 10 years?
b. What will be the growth in demand for owner-occupied units over the next 10 years?
The two annual growth rates in real income (and two corresponding income elasticities) should be considered separately (rather than taking an average).
Doing so would allow you to have four different growth-in-demand scenarios for each question to consider and compare in terms of different growth rates associated with different income elasticities. Also, the compounded growth in real income over the next 10 years should be used in your analysis.
2.1. In recent months, the price of jet fuel used by airlines has increased dramatically.
As the CEO of Blue Sky Airlines (BSA), you have been presented with the following options to deal with this problem: . Option 1: Raise airfares to offset cost increases.
Option 2: Reduce the number of flights per day in some markets.
Option 3: Make long-term contracts to buy jet fuel at a fixed price for the next two years and set airfares to a level that will cover these costs.
a. Evaluate each of these three options in the context of the economic concepts and business strategies we have learned in the course and explain how you would deal with this situation.
NOTE: You must first determine and define the nature and the structure of the market in which BSA competes before evaluating these options; otherwise, your evaluation will be meaningless.
Your answers will be graded based on how you apply the relevant economic concepts and theories we have learned in this course in support of your reasoning and arguments.
As you know, airlines practice price discrimination by charging leisure and business travelers with different prices. They could do so because of the different elasticity of demand between these two groups of travelers.
Different customers pay varying prices for essentially the same coach seat because some passengers qualify for discounts and others do not.
Since the discounts are substantial in many cases, the customer who qualifies for a discount pays a significantly lower airfare.
Now, please answer the following question:
b. Is this consistent with profit-maximization? Given the current high cost of jet fuel, will you continue this practice? Why or why not? Please explain.