Question

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

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

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

(c) Which of the arguments in (a) or (b) do you find more compelling? Why? (5%)

I have this question in my online mid-term. can you please answer accordingly

Answer 1

Answer:- ben The COVID - 19 pandemic has caused a huge decline in the demand for the aurblane tickets. Thus, the demand curve will shift leftwarde ( from Di to Da). unit 1 Airline Ticket Demand and supply losue . Thus the Equilibenum point shifts from E, to Ez. 3. If the airlines continue to charxe at P., then quonstity demanded would be so which is quite low, this their revenue will fall

An - Thus, they should demea their berice from P to P such that their sales - în wrease from og to at which will manimize their total Revenue . Ans-b) Although the equilibrium hoice and quantity have declined yet the price elasticity of demand for passengers , who still want to fly or travel during these times, could be touch This Low This if the airlines increar the prices, the quantity demande d for these specific hassingers would not fall that much which would

Date Page lead to an increase in revenue for the airlines. Ansc) I think the arquement in option (a) is more compelline as in this tough times people are avoiding travelling by airlines specially, while caused the demand curve to shift towards left hy a barre margin . Thus for the airlines it would be better to derease the prices for manimising the revenue