I will need this to be done on time and no extra days is recommended
Hands-On Exercise #2
The Sioux Gateway Airport (SUX) is a small airport located in Sioux City, IA. Currently,
American Arilines is the only airline which flies out of SUX; flights go from SUX to
Chicago/O’Hare airport (ORD). Other airlines, such as Frontier have considered offering flights
from SUX to the Denver Airport (DEN).
Suppose an airport similar to SUX has a single, dominant carrier (DC) which makes 4 trips per
day to and from SUX to ORD. As the only carrier, DC can charge monopoly prices and make
monopoly profit. DC’s demand function is as follows: QDC = 285 – .75PDC. DC has $15000 per
day in fixed costs and the marginal cost per passenger is $40.
a) Using the template provided and Excel’s Solver function, find the profit maximizing price for
DC. How many tickets do they sell each day (round to the nearest passenger)? What is DC’s
daily profit?
Suppose another, secondary carrier (SC), decides to offer a flight each day to and from SUX to
DEN; this monopoly market has become a two-firm oligopoly with a dominant firm. SC’s
demand function is as follows: QSC = 120 – .5PSC + .2PDC. SC has 5000 per day and the
marginal cost per passenger is $60.
Additionally, DC’s demand function shifts and changes to QDC = 225 – .75PDC + .25PSC.
Using the template provided, update DC’s demand information. Add SC’s demand and cost
information. Also, add a formula to calculate DC and SC’s joint profits. Be sure to connect DC’s
price to the SC template and SC’s price to the DC template.
b) Assuming DC continues to charge the price you found in part a, how do DC’s quantity and
profits change? (Use Solver to find this; round to the nearest passenger where necessary.)
c) Assuming DC continues to charge the price you found in part a, what price should SC charge?
How many tickets to they sell? What is their profit?
d) Suppose DC and SC can find a way to collude and maximize their joint profits. What price
will each charge and how many tickets will each sell (round tickets to the nearest passenger)?
What are DC and SC’s profits?
e) Should SC keep the agreement with DC and maintain a higher price? Why or why not? Use
solver to find the price SC should charge assuming DC keeps the agreement. How many tickets
will they sell and what will profit be?
f) Should DC respond to SC’s price change? Why or why not? Use solver again to figure out
what DC should do in response to SC’s price change. At what price does DC maximize profits
with SC’s new price? How many tickets do they sell and what will profit be?
