Ch16Solutions - Homework 9 Chapter16 Solutions 3 a Since...

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Unformatted text preview: Homework 9 Chapter16 Solutions 3 . a) Since few airlines fly to Northwest Arkansas Regional Airport, the airlines that do fly there can charge a higher price because each airline’s demand is a large portion of the airline market to and from this airport. If each airline faces a large portion of the overall market demand then each airline has more influence over the market price. b) Business people travel to Northwest Arkansas Regional Airport because they need to be in the vicinity of the airport in order to do their job. As a result, a businessperson gets greater benefit from a ticket to or from Northwest Arkansas Regional Airport, implying airline demand that is based on business travelers would be more inelastic than demand based on leisure travelers. A relatively inelastic demand curve implies that quantity demanded is less responsive to price changes, so the firm can increase prices without losing passengers. Figure 3b illustrates this fact for inelastic and elastic demand curves that produce the same profit maximizing quantity. Figure 3b c) If more airlines were permitted to fly to Northwest Arkansas Regional Airport than each individual airline would receive a smaller share of the aggregate demand for airlines tickets to and from Northwest Arkansas Regional Airport. The result would be lower prices and fewer passengers per airline carrier. Figure 3c depicts the effect of a reduction in demand that an individual oligopolistic air carrier would receive if more firms entered their market. Figure 3c 5. a) The success of a cartel depends upon the number of people in the cartel (the less firms the easier it is for them to monitor), the substitutability of the good being sold (if there are many other goods that do the same thing, then the less influence the cartel can have over the price), and the relative market share of each firm (more equal shares imply that firms will benefit more uniformly from the cartel agreement). Since there are many substitutes for natural gas, we would expect that the demand for natural gas is relatively elastic, implying that the cartel will be able to increase the price less relative to the competitive price (compared to a more inelastic c) If more airlines were permitted to fly to Northwest Arkansas Regional Airport than each individual airline would receive a smaller share of the aggregate demand for airlines tickets to and from Northwest Arkansas Regional Airport. The result would be lower prices and fewer passengers per airline carrier. Figure 3c depicts the effect of a reduction in demand that an individual oligopolistic air carrier would receive if more firms entered their market....
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Ch16Solutions - Homework 9 Chapter16 Solutions 3 a Since...

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