26 Jul EXPLAIN THE ECONOMICS BEHIND WHAT IS GOING ON HERE.
1 Show more Suppose that US Airways aggregate demand curve for seats in this quarter is Q = 20000-20*P for P < 1000 where P is its price in dollars. Its marginal cost is $100 per passenger. (i) What is US Airways prot-maximizing price? (ii) When US Airways sets the prot-maximzing price what is the value of consumer surplus and deadweight loss? What is the rms prot? (b) Lets suppose we write demand in a different way. Marginal cost is still $100. Suppose that there are 20000 potential passengers on the National-Charlotte market. The willingness to pay of an individual potential passenger is uniformally distributed between $0 and $1000 and a passenger will travel if and only if the price set by US Airways which has to be the same for all passengers is less than their willingness to pay. (i) What will be the quantity of seats sold (i.e. number of travellers) if US Airways sets a price of $100? $550 dollars? (ii) What is the rms aggregate demand curve (i.e. given an expression like the one above)? (iii) What would be its aggregate demand curve if valuations (i.e. willingness to pay) were uniformally distributed between $0 and $800? In this case what would be the prot-maximizing price the consumer surplus deadweight loss and prot? (c) It takes about 7.5 hours to drive from DC to Charlotte. For business travellers driving is not an option. Suppose that there are 10000 potential business travellers with willingness to pay uniformally distributed between $0 and $1000. There are 10000 potential leisure travellers with willingness to pay to go to Charlotte also uniformally distributed between $0 and $1000 but they will drive if US Airways charges a price of more than $200 (i.e. you can think of the eective price of the substitute as $200). US Airwayss marginal cost is $100. (i) What is US Airways prot-maximizing price? Show your reasoning. (ii) Suppose that US Airways wants to maximize its revenue. What price should it set? (d) To get from Charlotte airport to downtown Charlotte you have to take a cab. Suppose that the city of Charlotte sets a cab price of $50 from the airport to downtown which exceeds the marginal cost of $0 (this keeps things simple). Travellers from DC who want to get to downtown not the airport take into account the total price of the trip not just the plane fare when deciding whether to travel. Suppose that there are 10000 potential travellers with values of getting to Charlotte downtown distributed between $0 and $1000. The marginal cost of the ight is $100. (i) What is US Airways prot-maximizing price? How much is the total cost to travellers? What is consumer surplus and total welfare (include cab companies in your calculation)? (ii) Suppose that US Airways could run its own cab service (marginal cost is zero) and include this in a single price. What price would it set? How would welfare change? [you can ignore the issu of competition with the pre-existing taxi service]. (iii) Explain the economics behind what is going on here. Give at least one other setting where this type of logic might matter. Show less
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