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Econ 306 Problem Set 1 S09

# Econ 306 Problem Set 1 S09 - 2 You work for an airline...

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PROBLEM #1. Supply and Demand 1. The price of oil peaked at around \$150 a barrel before falling back to the \$30-\$50 range in recent weeks. This is up from \$60-\$70 in 2007, and much lower before that. Some attribute the price increase to the rapid growth of the Chinese economy and the associated growth in the demand for oil. Others attribute it the oil cartel, OPEC, or to speculation. Show how to formulate this problem in terms of supply and demand curves, and indicate the effects of an increase in demand (be sure to include a discussion of the role of price elasticity in your discussion, and the distinction between short-run and long-run elasticities). How would the proposal to increase exploration for oil appear in this framework? How would efforts conserve on the use of oil affect your analysis? Is there a role for speculation in your analysis?
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Unformatted text preview: 2. You work for an airline company and are given the assignment of finding the optimal pricing structure for seats, given that there are two types of travelers: those that book their flights dwell in advance of their departure, and thus are presumed to be more sensitive to the price of the ticket, and those who book close to the time of the trip, and are presumed to be less price sensitive. You have determined that their demand curves are P L = 20 – 2Q L and P H = 40 – 4Q H , respectively. Both types of traveler are currently being charged \$12, and your job is to find the prices, P L and P H , that maximize revenue. You recall the IPOD problem from Econ 306, and apply that solution. What prices do you propose? How much more revenue do you get with the new prices. What does the point elasticity of demand have to do with your solution? ....
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