Question

The COVID-19 pandemic is a headache for airlines, who struggle to determine a pricing strategy for their businesses. Consider the market for airplane tickets. Assume that airlines can choose prices (i.e. shift the supply curve at whim), and that their goal is to maximize revenue (i.e. P rice × Quantity ). Your task is to help them fulfill this goal.

(a) Using supply and demand curves, argue that airlines should decrease ticket prices during COVID-19. (5%)

(b) Using supply and demand curves, argue that airlines should increase ticket prices during COVID-19 (hint: consider elasticities of demand). (5%)

(c) Which of the arguments in (a) or (b) do you find more compelling? Why?

Answer 1

A) Since the COVID-19 is a pandemic which is affecting people all over the world, at this time it is important for airlines to lower their prices so that the people stuck in countries outside their home countries can reach back home safely and get treated.

The airlines must increase their supply of flights and thus lower prices so as to cater to maximum people in times of need.

B) Looking at the situation from a purely business perspective, since demand for flights at this time is highly inelastic, the best way for airline companies to capitalise on this inelastic demand is by raising prices of tickets

C) The first argument is more compelling, as in times of such distress, instead of making money, airline companies must come to the rescue of the stranded anx help them reach homes safely.