Airfare Under 50
airfare under 50
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What is the profit maximizing fare and the annual number of passenger trips?
Entry of new airlines to the CARICOM region is severely restricted and as a consequence regional airlines charges higher airfares than US airfares for routes of comparable distances. An airline expert estimates the annual air travel demand between Trinidad and Antigua to be:
Q = 1,000 – 10P; where Q is the number of trips in (000’s) and P is the one-way fare in US dollars. In addition, the long-run average cost (one-way) per passenger is estimated to be $50
a) Some economists have suggested that there is an implicit cartel among the regional
air carriers under the shield of regulation. Based on the above, find the profit
maximizing fare and the annual number of passenger trips.
b) Suppose the Caribbean market was deregulated so that the routes become perfectly
competitive, find the price and the number of trips for the Kingston-Georgetown
route.
a. It’s a case of monopoly. The long-run average cost is $50, when we set the price=$50, so Q= 500. But in this case the monopolist will produce in any point less than 500 and set the price higher than $50 even in the long run.
b. In a perfectly competitive market, the price will be at $50, and Q will be 500.
