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Formerly, the market for air travel within Europe was highly regulated. Entry for new airplanes was severely restricted, and air fare were set by regulation. Partly as a result, European air fares were higher than US fares for routes of comparable distance. Suppose that, for a given European air route ( say London to Rome) annual air travel demand is estimated to be Q= 1500 -3P (or equivalently, P = 500 - Q/3), where Q is the number of trips in thousands and P is the one-way fare in dollars. (For example, 600 thousand annual trips are taken when the fare is $300.) In addition, in the long-run average (one-way) cost per passenger along this route is estimated to be $200.
a. Some economist have suggested that during the 1980s and 1990s there was an implicit cartel among Europeans air carrier whereby the airlines charged monopoly fares under the shield of regulation. Given the preceding facts, find the profit maximizing fare and the annual number of passengers trip.
b. In the last 10 years, deregulation has been the norm in the European market, and this has spurred new entry and competition from discount air carrier such as Ryan Air and EasyJet. find the price and quantity for the European air route if perfect competition become the norm.
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