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 8, Problem 2.1P
To determine
Discount ticket outlets and marginal cost.
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JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.)
Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future.
(a) What is the appropriate economic model to study price competition in this market?
(b) If you use Nash equilibrium to make a prediction, what…
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Principles of Economics (12th Edition)
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- JetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week’s profits, and that neither one would consider shutting down the route in the foreseeable future. a) What is the appropriate economic model to study price competition in this market, and why? b) If you use Nash equilibrium to make a…arrow_forwardJetBlue and Delta are the only two major airlines with regularly scheduled service between New York and Nantucket. There are 900 potential passengers every week, each of whom is willing to pay up to $400 for a ticket. Since the two airlines provide an essentially identical (bad) service, customers simply prefer to buy from the cheaper one. (If they charge the same price, then they will split the market equally.) Each airline can transport at most 1200 passengers each week. You can safely assume that each airline spends literal peanuts (i.e., zero) serving passengers; however, each passenger displaces air cargo that is worth $160 in profits to the carriers. Suppose that each airline takes a short-run perspective and only wants to maximize each week's profits, and that neither one would consider shutting down the route in the foreseeable future. (a) What is the appropriate economic model to study price competition in this market? (b) If you use Nash equilibrium to make a prediction, what…arrow_forwardConsider a buyer who, in the upcoming month, will make a decision about whether to purchase a good from a monopoly seller. The seller “advertises” that it offers a high-quality product (and the price that it has set is based on that claim). However, by substituting low-quality components for higher-quality ones, the seller can reduce the quality of the product it sells to the buyer, and in so doing, the seller can lower the variable and fixed costs of making the product. The product quality is not observable to the buyer at the time of purchase, and so the buyer cannot tell, at that point, whether he is getting a high-quality or a low-quality good. Only after he begins to use the product does the buyer learn the quality of the good he has purchased. The payoffs that accrue to the buyer and seller from this encounter are as follows: The buyer’s payoff (consumer surplus) is listed first; the seller’s payoff (profit) is listed second. Answer each of the…arrow_forward
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