1. Southwest Airlines is adding $100 million a year in new fees. Under new rules customers only get a partial refund for missed flights, prices are being raised for a third checked bag and for early boarding slots. The airline wants to increase revenue by $ 1.1billion.
A. Using the law of demand, do you predict that demand will increase, decrease or stay the same? Give your reason.
B. The demand for airline flights appears to be elastic. What may happen to total revenue if Southwest raises its prices?
2. Multinationals operating in China has been setting up factories deep in the interior in search of affordable labor. For companies exporting to Europe shipping by air is too expensive. Hewlett Packard-HP has transported 4 million notebook computers by rail. Shipping one container by rail costs $ 10,000, one-third the price of air transit. It takes only 21 days to ship by rail, 40 days by sea. Shipping costs are factor cost for suppliers.
A. In your opinion will HP lower laptop prices or just increase profits?
B. What is the price of air transit? Are marginal benefits greater than marginal costs?
3. The IBM Corporation has 3 major plants in the United States. At each plant management quadrupled the inputs in an effort to increase output. At Plant A the output doubled, at Plant B the output increased 4 fold and at Plant C the output increased fivefold.
For each plant what type of returns to scale was experienced? What conclusions could you make about the performance of Plant C?