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Eastern Airlines offers coach seats on its flight from Milwaukee to New York for $250. Sales have averaged 700 per day during the last year. Eastern's primary competitor (Continental Airlines) cut their prices from $220 to $200. The quality of travel is the same between airlines (no special cookies!). However, due to brand loyalty, the prices are not the same. Eastern Airlines witnessed a decrease in the traffic from 720 to 650.

 

1. Determine the arc cross elasticity of demand among Eastern's flights and the Continental's flights.

2. If Eastern Airlines knows the arc price elasticity of demand for its airplane tickets is -2.12, discuss what price would they have to charge in order to obtain the same level of sales as before Continental's price cut?

Macroeconomics, Economics

  • Category:- Macroeconomics
  • Reference No.:- M91143008

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