Problem 1: Airfares in the United States have increased by about 43 percent from September 2021 to September 2022. The price increases: "...haven't kept passengers away, as consumers give priority to spending on travel...over... goods..." Does this imply that the demand for air travel is elastic or inelastic?
Problem 2: Airlines practice price discrimination when they charge different ticket prices for the same flights. Consumers who have the highest willingness to pay are charged higher prices than prices paid by consumers with a lower willingness to pay. Successful price discrimination requires that airlines prevent their customers from engaging in arbitrage.
- What is arbitrage?
- Describe one way airlines use to prevent customers from engaging in arbitrage.
Problem 3: From the article: "Passengers are paying more as airlines have been able to raise fares enough to cover higher costs of fuel and labor without derailing demand." Would an increase in air fares result in a change in quantity demanded or a change in demand for airline tickets? Briefly explain.