Southwest Airlines begins a \"Bags Fly Free\"campaign, dunging no fees for a fir
ID: 1255908 • Letter: S
Question
Southwest Airlines begins a "Bags Fly Free"campaign, dunging no fees for a first and second checked bag. Does this situation best represent producer -producer rivalry, consumer consumer rivalry, or consumer-producer rivalry? Explain. What is the maximum amount you would pay for an asset that generates an income of $250.000 at the end of each of live years if the opportunity cost of using funds is s percent? Suppose that the total benefit and total cost from a continuous activity are respectively, given by the following equations: Write out the equation for the net benefits. What are the net benefits when Q = 1 ? Q = 5? Write out the equation for the marginal net benefits. What are the marginal net benefits when Q = 1 ? Q = 5? What level of Q maximizes net benefits? At the value of Q that maximizes net benefits, what is the value of marginal net benefits?Explanation / Answer
1. Producer-Producer rivalry. (Explanation: This case shows Southwest Airlines wants to improve their sales. In this case, they are in a race with their rivals. This case is not about the other rivalry types except producer-producer rivalry)
2. The maximum you would be willing to pay for this asset is the present value, which is,
P V = 250, 000/(1 + 0.08) + 250, 000 (1 + 0.08)2 +250, 000/(1 + 0.08)2+250,000 / (1 + 0.08)2
+ 250, 000 / (1 + 0.08)2
= $998,178
3.(a) Net Benifit = 100 + 36Q - 4Q2 - 80 - 12Q = 20 + 24Q - 4Q2
(b) When Q = 1
Net Benifit = 20 + 24Q - 4Q2 = 20 + 24(1) - 4(1)2 = $40
When Q = 5
Net Benifit = 20 + 24Q - 4Q2 = 20 + 24(5) - 4(5)2 = $40
(c) Marginal Net Benefit = 36 - 8Q - 12 = 24 - 8Q
(d) When Q = 1
MNB = 24 - 8(1) = $16
When Q = 5
MNB = 24 - 8(5) = - $16
(e) Net benefit will be maximized when MB = MC
36 - 8Q = 12
8Q = 24
Q = 24/8 =3
(f) Marginal Net Benefit = 24 - 8(3) = 0
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