1. 1. Southwest Airlines is adding $100 million a year in new fees. Under new ru
ID: 1090835 • Letter: 1
Question
1. 1. Southwest Airlines is adding $100 million a year in new fees. Under new rules customers only get a partial refund for missed flights, prices are being raised for a third checked bag and for early boarding slots. The airline wants to increase revenue by $ 1.1billion.
A. Using the law of demand, do you predict that demand will increase, decrease or stay the same? Give your reason.
B. The demand for airline flights appears to be elastic. What may happen to total revenue if Southwest raises its prices?
1. 2. Multinationals operating in China has been setting up factories deep in the interior in search of affordable labor. For companies exporting to Europe shipping by air is too expensive. Hewlett %u2013Packard %u2013HP has transported 4 million notebook computers by rail. Shipping one container by rail costs $ 10,000, one-third the price of air transit. It takes only 21 days to ship by rail, 40 days by sea. Shipping costs are factor cost for suppliers.
A. In your opinion will HP lower laptop prices or just increase profits?
B. What is the price of air transit? Are marginal benefits greater than marginal costs?
1. 3. The IBM Corporation has 3 major plants in the United States. At each plant management quadrupled the inputs in an effort to increase output. At Plant A the output doubled, at Plant B the output increased 4 fold and at Plant C the output increased fivefold.
For each plant what type of returns to scale was experienced? What conclusions could you make about the performance of Plant C?
Explanation / Answer
1.
A) With an increase in fees and charges charged by the Airline company, the demand will decrease. This is because consumers will easily switch from that Airline company to another.
B) Demand being elastic, an increase in price will lead to a more than proportionate fall in quantity demanded and sold. As a result, revenues fall.
2.
A) It will be profitable for the company to lower down its prices, in order to earn a competitive edge over their competitors in the market. This will lead to higher profits for the company.
B) Price of air transit will be 3*$10,000 = $30,000.
No, the marginal benefits wont exceed the marginal costs as the company anyways will be selling the same amount of goods in the market, but now at lower prices.
3.
The returns to scale experienced at the plants are:
Plant A - Decreasing returns
Plant B - Constant returns
Plant C - Increasing returns
Performance of Plant C is very efficent as it has increasing returns to scale. Increasing inputs leads to more than proportionate increase in the output.
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