Problem: 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:
Per Capita
American's United's Monthly American's United's
Mo Price Price Income Load Factor (Q) Load Factor
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
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? That is, select appropriate months and compute elasticity values to complete the following table.
Elasticity (arc) Value
(1) Own-price elasticity of demand for American's economy class seats
Using months 1 & 5 and the mid-point method, my value = 5.57
(2) Income elasticity of demand for American's economy class seats
Using months 2 and 3 and the mid-point method, my value = 1.2
(3) Cross-price elasticity of demand for American's economy class seats with respect to United's price on the same route
Using months 1 & 2 and the mid-point method, my value = 2.61
Hint: In each case, choose a pair of months in which all else is equal except quantities and the variable you are examining (for example, between months one and two, the American price, and income remained constant and only United's price changed. We can attribute the change in demand for American load factor to change in United's price level. Knowing these changes, we can calculate the cross price elasticity.)
Are economy class tickets a normal or inferior good in the Chicago-Columbus market? Explain.
It is a normal good. When income increases, the demand for the good increases.
How close a competitor/substitute does United appear to be in the Chicago-Columbus market? Explain.
I think United is a very close competitor/substitite for American's flights in this route.
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 TR and TC if you change your price.)
I think American could lower its price to increase profits.
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.
I think this would be difficult to determine. The longer the time that elapses, the less reasonable it is to assume that all the other variables stayed equal.