Question

3. Calculations: (20 points) An entrant airline started its operation in just one market in January 2006. In the first month, its monthly total cost was $5 million, the average ticket price was S120, and the t passengers served by this airline in this market was 45,000 in January fuel price, its monthly total cost in May 2006 went up 10% higher than in January 2006 In response to the 10% cost increase, this airline decided to increase its ticket price by 5% in May 2006 . What would be this airlines' profit in May 2006. Due to the increase of 2000, it the price elasticity in this market was -1.2 during this time period (from January to May 2006)?

Answer 1

Price elasticity of demand = -1.2
Increase in ticket price = 5%
Therefore decrease in demand = 1.2 x 5 = 6%

Therefore New demand = 45000 x 94% = 42300
New Price = $120 x 105% = $126

Increase in cost = 10%
Therefore new cost = $5 million x 110% = $5.5 million

Revenue = $5329800 ($126 x 42300)
Cost = $5500000
Profit /(loss) = ($170200)