Question

ABC is a regional airline providing shuttle service between New York and Washington, DC. An analysis of the monthly demand for service has revealed the following demand function: Qd = 26,000 - 500P + 250PR + 20018 -5,000s where Qd represents the number of passengers per month; P is the price in dollars); PR is the price index for other goods; Ig is an index of business activity; S represents different months of year, S = 1 in summer months and S =0 the other months of the year. Questions: Part A 1. Determine the demand function of ABC airline during the winter month of January if PR = 4 and lg = 250. 2. Determine the inverse demand function. 3. At what price level P will ABC airline have no customer?

Answer 1

Part A 1. During the winter month of January, s=0. And PR = 4, IB = 250 i. Demand: Qd = 26000 - 500 p +(250×4)+(200x250) -(5000 xo) A G =26000 - 500 p + 1000 + 50000 - 0 7[Gº= 77000 - 500 p

2. Gd = 77000 - 500 P 500 P = 77000 - od P = 154 -0.002 Gd inverse demand equation 3. If Go = 0, from the inverse demand equation we get, P = 154 -(0.002x0) = 154 . . At p = 154, ABC airline will have no customer. 4. When p= $80, from the demand equation we get, Go Qd = 77000 - (500×80) = 37,000 154 cas - Demand 37000 the demand curve and Cis is the area below above the price. cos - * 37000 m (154 - 80) = $ 1,369,000 Part B 5. In the summer month of July, s=1. If PR = 4 ; 18 = 250 and P = $100 then, Qd = 26000 - (500 x 100)+(250 x 4)+(200x250) - (5000x1) => [Q° = 22000 G. Total revenue = posice & Quantity = $(100* 22000) = $2,200,000