Question

As a national manager for Southwest Airlines you have recently undertaken a survey of the number of passengers per flight on the Boston-Phoenix route that you service. The survey was conducted over five successive months. The data collected included the round-trip fare for an economy-class flight, the average annual per capita income of people who fly the Boston-Phoenix route, and the average passengers per flight on both Southwest and American. Assume that all other factors (the price charged by other airlines, the size of planes flown, etc) have remained constant.

	Price			Passengers per Flight
Month	Southwest	American	Income	Southwest
1	$440	$448	$40,000	$130
2	$440	$448	$42,000	$140
3	$436	$444	$38,000	$140
4	$432	$440	$38,000	$130
5	$436	$440	$38,000	$134

Fill in your answers in the allotted spaces. For parts a, b, and c. Remember that the key to calculating an elasticity is to find the pure effect by holding everything else constant (or have no other variable change). This influences which observations you will use in calculating the elasticities.

a. On the Boston-Phoenix route, calculate an estimate of the price elasticity of demand for Southwest economy seats. Show your work and explain.

b. For the same route determine the income elasticity of demand for Southwest economy seats. Show your work and explain

c. Also calculate an estimate of the cross-price elasticity of Southwest flights with respect to American flights on the route. Show your work and explain

d. Based on your price elasticity estimate, would Southwest obtain higher total revenue by lowering its price? Explain

e. Based on your elasticity estimates, are Southwest and American flights substitutes or complements? Explain

f. Are Southwest’s economy seats a normal or inferior good?Explain.

These last two questions go beyond the estimates that you have calculated.

g. If consumers had been given more time to adjust to price changes, would you expect the price elasticity of demand to be more inelastic or more elastic? Explain

h. Consider the price elasticity of demand for the category flights on all airlines between Phoenix and Boston. Would that price elasticity be more elastic or more inelastic than the elasticity for just Southwest flights? Explain

Answer 1