Consumer Behavior and Elasticities

As the Midwest regional manager for American Airlines, you have recently undertaken a survey of economy-class load factors (the percentage of economy-class seats that are filled with paying customers) on the Chicago-Columbus, Ohio route that you service. The survey was conducted over 5 successive months. The survey results appear in the table below. Assume that all other factors have remained constant over the 5-month period:

1. Based on the data you have collected, how responsive is your company’s load factor on the Chicago-Columbus route to your own price, income levels, and United’s price? Select appropriate months and compute elasticity values to complete the following table.  How your work.

 Hint: Elasticity here is based on ceteris paribus conditions – all other things unchanged. This means that if own price changes, income and price of competitor stay the same.  In fact, there should be only one pair of consecutive months that meet the “all other things unchanged” criterion for each elasticity coefficient to be calculated, and it is a different pair of months for each one. The quantity is always the change in American’s load factor. The “price” is the price of American’s tickets, or the income, or the price of United’s tickets.

2. Based on the survey you have undertaken, to increase your profits, should you raise your price, lower it, leave it unchanged, or is it impossible to tell without more information? (Hint: consider what will happen to total revenue and total costs if you change your price.)

3. If you had conducted your survey over a period of 5 successive years rather than over 5 successive months, would the own-price elasticity of demand for your product be larger or smaller than your estimate here? Explain.

4. You know from the readings on supply and demand that demand is made up of all of the determinants for which you have calculated elasticities (price, income, cross price for substitution).  Which factor is the most important in determining demand?  Explain how you arrived at that conclusion and why it might (or might not) make sense. 

This assignment may be prepared in a question/answer format, and you may use an excel spreadsheet to supplement.

Factor                                                                                                Possible Points

Correct calculation of elasticities (part 1)                                                  50

Correct interpretation of elasticity coefficients (parts 2 and 3)                 25

Reasonable interpretation of elasticity coefficients (part 4)                      25