Reference no: EM13242165

Problem 1. In recent months, the price of jet fuel used by airlines has increased dramatically. As the CEO of Blue Sky Airlines (BSA), you have been presented with the following options to deal with this problem: 

• Option 1: Raise airfares to offset cost increases. 
• Option 2: Reduce the number of flights per day in some markets. 
• Option 3: Make long-term contracts to buy jet fuel at a fixed price for the next two years and set airfares to a level that will cover these costs. 

a. Evaluate each of these three options in the context of the economic concepts and business strategies we have learned in the course and explain how you would deal with this situation. 

As you know, airlines practice price discrimination by charging leisure and business travelers with different prices. They could do so because of the different elasticity of demand between these two groups of travelers. Different customers pay varying prices for essentially the same coach seat because some passengers qualify for discounts and others do not. Since the discounts are substantial in many cases, the customer who qualifies for a discount pays a significantly lower airfare. Now, please answer the following question: 


b. Is this consistent with profit-maximization? Given the current high cost of jet fuel, will you continue this practice? Why or why not? Please explain. 


Problem 2. An industry said to be characterized by monopolistic competition is the apparel industry. In May 2013, a Wall Street Journal article on apparel pricing began this way: “Remember all the nifty bargains you found shopping for clothes last year? So do retailers. And, they vow never again. For two years, stores have countered slowing demand for apparel – from sweats to cocktail dresses – with constant discounting, trying to spur demand by giving up profits. Now, after one of their least profitable years, big apparel merchants are ruling out another avalanche of sales and markdowns . . . They are developing an array of merchandizing gimmicks to wean shoppers off their addiction to deep discounts.” 

Not surprisingly, this scenario sounds quite familiar, especially during the holiday seasons. The issue is whether monopolistic competitors can protect their profits. Suppose you were hired as a consultant by a firm in this industry. How would you advise the firm as to the levels of output, price, and advertising in order to protect their profits? What problems might the firm encounter? 


Problem 3. Suppose that the annual growth in real income in Japan is expected to be between 2 and 3 percent and that income elasticity of demand for housing in Tokyo is estimated to be between 0.8 and 1.0 for rental units and between 0.7 and 1.5 for owner-occupied housing. 

Questions: 

a. What will be the growth in demand for rental units over the next 10 years? 
b. What will be the growth in demand for owner-occupied units over the next 10 years?