Economics 4140/5140 Homework #3 Due: Feb. 14, 2011

Managerial Economics

1) (20 points) In the article below, calculate the arc price elasticity of demand for air travel for each of the three city pairs mentioned. Show your work.

Dallas Morning News August 30, 1997, p. 2F

## Federal study documents effects of low-fare airlines

WASHINGTON - Fares plummet and passenger loads skyrocket when a low-price airline starts flying between a pair of cities. Baltimore and Cleveland, for example. Just 12,790 people flew between those cities in the last three months of 1992, at an average fare of \$233. Then Dallas-based Southwest Airlines entered the market. In the last three months of 1996, 115,040 people flew between the cities at an average fare of \$66.

Curious about the exact impact of low-cost carriers, the Transportation Department analyzed fares and passenger flow across the country. The Baltimore-Cleveland figures were one result. "The fares that many low-fare carriers charge can greatly expand the air travel market, enabling many who would otherwise not travel by air to do so," the department reported. Indeed, there are a huge number of Americans who want to fly if they can get low enough prices, a department analyst said.

Take the Kansas City-San Francisco connection, for another, example. In the last quarter of 1994 some 35,690 people made the trip at an average fare of \$165. Two years later, after the arrival of Vanguard Airlines, fares had dropped to an average of \$107 and traffic had nearly doubled to 68,100.

Or the Baltimore-Providence, R.I., route, where the average fare fell from \$196 to \$57 and the number of passengers carried jumped from 11,960 to 94,116.

The study also found 19 routes where things went the other way. - Associated Press

2. (10 points) Normal good. Let the demand equation be given by: Qd = 60-2Px +10I. (I stands for Income.) Draw a 3 dimensional graph in Excel using the following matrix:

Income
\$10 / \$20 / \$30 / \$40 / \$50
\$0
Price / \$10
\$20
\$30
\$40
\$50

3. (10 points) Inferior good. Let the demand equation be given by: Qd = 2500-20Px –25I. Draw a 3 dimensional graph in Excel using the following matrix:

Income
\$0 / \$10 / \$20 / \$30 / \$40 / \$50
\$0
Price / \$10
\$20
\$30
\$40
\$50

4.  (20 points) Ch. 3 #3 (a, b, and c), p. 122

5.  (20 points) Ch. 3 #10, p. 124

6.  (20 points) Find an article in the Wall Street Journal this week and type a brief synopsis (approximately 250 words) of the article. The article should relate to some managerial economics topic. Do not pick a macro/monetary economics topic. Focus on managerial decisions. Attach a photocopy of the article. The printed copy is usually available in the Willis Library. Of if you have an online subscription to the WSJ you can print it out. Note: the online version of the WSJ shows only the main headlines. You need a subscription to read the entire article(s).