Q1) In this case study, the price elasticity of Oresund Bridge is likely to be price elastic. Price elasticity is influenced by many factors, some of which exist in this case. The first major factor is that price elasticity is high when alternative options are available. …
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In this case, people or basically the target audience of this bridge has the option of the ferry available. A rise in the prices will lower the demand for the bridge by a larger ratio as people will prefer to travel by ferry. Similarly, a fall in price will increase the demand by a larger ratio because more people would be able to afford it now. The second factor is that people like to travel from Denmark to Sweden, or vice versa, but they do not need it. Therefore people will only travel if the price is right, which is to say low. Whenever the price decreases, more people can afford it and this results in price elasticity.
Q2) The Swedish government has estimated the price elasticity to be at -1.4. This has several implications for the traffic on the bridge. The Swedish government knows that first of all, an inverse relationship exists. This means that a decrease in price will definitely increase the demand and this can help the government in properly pricing it. The second implication is that any change in price will have 1.4 times the change on the demand. This means that for the government, it is beneficial to decrease the price to increase the demand. For example, if the government reduces the price by 10%, then it will result in a 14% increase in demand. Therefore, this information can be helpful in pricing the tickets for the bridge. Q3) This calculation of price elasticity of -1.4 is not beneficial in the long run because first of all, price elasticity tends to change overtime. Secondly, the government is thinking of changing the price and there is always different price elasticity for every price level. Therefore if the price changes in the near future, then the price elasticity will change instantly. Lastly, advertisement campaigns play a huge role in changing the price elasticity, thus calculation is not useful in the long run. Case study 3.3: The Texas state bird Q1) PED= % Change in demand % Change in price Burbank-Oakland route PED= 120.68% =- 2.51 48% Kansas City-St. Louis route PED= 50.0% = 0.714 70.0% Q2) The above calculated price elasticity applies for the entire industry operating these routes. It does not specifically represent the price elasticity of Southwest Airlines because the values considered for the calculation are for the entire industry. This includes Southwest as well as its competitors. Q3) The Burbank-Oakland route has a high price elasticity of demand which means that the demand is price sensitive. The implication for the price setters is that these airlines should reduce the price of this route a little bit because this increases the demand by a great deal and increases the profitability. On the other hand, it must be kept in mind that the demand will decrease rapidly if the price of this route increases even by a little bit. If the price increases, then it will lower the demand by a large ratio and this will reduce the profits earned. Therefore this high price elasticity of demand can have very crucial implications for Southwest. (AmosWEB) Q4) Although the Kansas City-St. Louis route shows positive price elasticity, it may still prove to be profitable for Southwest to reduce their price. When a company reduces their prices or fares their market share increases and this often results in a long term profit. When Southwest will have a greater market share, they can change the prices according to their strategy. Also, although the price elasticity is positive, it is not at a high level and thus lowering the prices and making small short term losses is not a bad deal if it means increasing market share. Case study 5.1: Microsoft – increasing or diminishing returns? Q1) It is unlikely that a firm is experiencing increasing and diminishing return
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