Additional Problems_key

Additional Problems_key - Additional Problems Introduction...

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Additional Problems Introduction to Microeconomics Non-Major Fall 2007 Prepared by Sylvie Démurger (Special thanks for her generous effort in designing and sharing this exercise!) Problem #1 (from last year final) E-commerce is predicted to reduce the cost of intermediary services such as those of travel agencies or investment advisors. Consider the market for air travel. Suppose that, with conventional travel agencies, the market equilibrium price for Hong Kong – Beijing plane tickets is $3,000 per ticket, including a $900 intermediation cost. The quantity bought is 2 million tickets a year. With e-commerce, however, the intermediation cost falls to $100 per ticket. a. Using suitable demand and supply curves, show how the intermediation cost affects the original equilibrium in the case of conventional travel agencies. b. Illustrate and explain the new equilibrium with e-commerce. c. Show on a graph what happens to the consumer surplus with e-commerce. d. How does the elasticity of demand for plane ticket affect the extent to which consumers will benefit from e-commerce? Explain your answer with demand and supply curves. Keys In the market for air travel, the demand arises from business and leisure travelers while airlines provide the supply. a. The $900 intermediation cost shifts up the original supply curve (from S1 to S2) and the equilibrium is at E with a price of $3,000 and quantity of 2 million tickets per year. 3,000
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Additional Problems_key - Additional Problems Introduction...

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