Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 7, Problem 3.3P
To determine
Decision making.
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You have decided to start a snow-plowing business whereby you will offer to plow the driveways of your neighbours' homes after heavy snowfalls. You are well known by everybody in your neighbourhood, you have a plow for the front of your truck, and you think that your neighbours would rather hire you than someone they do not know. From your research, you know that homeowners are charged an average of $40 to plow their driveways after a heavy snowfall. Interestingly, a few years ago, your research tells you that homeowners were charged an average of $25 to plow their driveways after a heavy snowfall. The average price has gone up, which excites you. Apply your learning about supply and demand to this fact pattern to analyze possible reasons for the increase in price. Consider the five factors that may impact demand and the 6 factors that may impact supply. What questions do you want answered before committing to this business?
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Suppose you are working as the CEO of an airline. One of your airline's wide-body aircraft operates in a two-class configuration with 500 economy seats and 200 business seats. On the routes the wide-body aircraft flies, the airline's marginal cost per passenger is $1,000 in economy and $1,500 in business. According to the airline's internal data, the willingness to pay (WTP) of leisure pax for economy travel is $2,000, while their WTP for business travel is $2,500. On the other hand, business pax' WTP for economy travel is $4,500, while their WTP for business travel is $10,000. Finally, airlines charge different fares for economy and business, and there are more pax with WTP's as specified above than the number of seats in each class. The maximum certified capacity for this widebody aircraft is 500 seats in economy, so the airline cannot increase the number of seats in this class any further. But if airlines deliberately degrade service in economy even further (e.g. by offering less…
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Principles of Economics (12th Edition)
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