Elasticity review
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:
| Month | American's Price |
United's Price |
Monthly per capita income |
American's load factor (Q) |
United's load factor (Q) |
| 1 | $110 | $112 | $2,000 | 65 | 60 |
| 2 | 109 | 110 | 1,900 | 62 | 63 |
| 3 | 110 | 112 | 2,100 | 70 | 66 |
| 4 | 109 | 111 | 1,900 | 70 | 61 |
| 5 | 108 | 110 | 1,900 | 68 | 59 |
a. 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? That is, select two appropriate months and compute elasticity values to complete the following table (available online: Arc elasticity calculator (Excel)):
| Elasticity (arc) | Month a | Month b | Value |
| (1) own-price elasticity of demand for American's economy class seats |
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| (2) income elasticity of demand for American's economy class seats. |
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| (3) cross-price elasticity of demand for American's economy class seats with respect to United's price on the same route |
Hint: In each case, choose a pair of months in which all else is equal except quantities and the variable you are examining (for example, choose months 2 and 5 for case (1).)
b. Are economy class tickets a normal or inferior
good in the Chicago-Columbus market? Explain.
c. How close a competitor/substitute does United
appear to be in the Chicago-Columbus market? Explain.
d. 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 TR and TC
if you change your price.)
e. 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.