Question

Updated Question:

A regional airline is renowned for its regular services to regional towns and capital cities. A second airline attempts to start similar services in competition with this airline. . The first airline reduces the average price of its tickets by $25 per passenger to try and sell as many seats as possible. Your task is to determine the consequences of the $25 price reduction. The supply and demand equations are given by Demand Equation: p = 175 - 15aq. Supply Equation: p = 0.00025q^2 + 5bq + 35 where q is the number of passengers (in thousands per year) ; p is the price of a ticket in dollars. a and b are coefficients to be chosen below.

Steps to complete to undertake the investigation

1. Obtain two random numbers for a and b between 0.1 and 0.9 inclusive. Use the Excel random function =Rand() or the RANDOM key on your calculator.

2. Find the equilibrium price and quantity algebraically, without the price reduction.

3. Update the demand equation to include the $25 price reduction.

4. Use algebra to find the new equilibrium price and quantity, with the price reduction.

5. Use Excel to graph on the same set of axes, the original supply and demand equations (from part 1) and the updated demand equation with the proposed price decrease (from part 3).

6. Use your results to complete the following summary table. Round answers to two decimal places, except for total revenue amounts which round to 0 decimal places

7. Summarise your findings in 300 words. In your conclusion: a. Discuss the effect of the price reduction on equilibrium price, quantity and revenue b. Provide a recommendation to the airline on whether to introduce the price reduction or not c. Note any assumptions you have made and any limitations of your findings.

Answer 1