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  • In 2009 and 2010 the US government instituted a program where all first-time homebuyers received an $8,000 tax credit upon the purchase of a new house. In April 2010, just prior to the credit?s expiration, sales rose 7.6% and the median US home price rose 4% to from $167,000 to $174.000. Assume that all buyers received the $8,000 subsidy.
  •  Show the effects of the subsidy on a graph.
  • Assuming that all buyers received the credit, estimate the own price elasticity of demand and own price elasticity of supply
  • Who gained more from the subsidy, buyers or sellers?
  • Suppose that the inverse demand function for movies is for college students and  for other town residents. What is the town?s total demand function ( as a function of p)? Use a diagram to illustrate your answer. The estimated demand function for pork is:
  • How does the equilibrium price of pork vary as the income (Y) if the variables that affect demand are held constant at their typical values (using the values .5, pb = 4, pc = 3.33 and .50)? (Hint: calculate  ).
  • Given the demand function above with all the values, what would be the cross-price elasticity between the price of chicken (pc) and the quantity of pork?

  • Please read the news following the link: http://www.wsj.com/articles/airline-fare-riddle-one-route-two-prices-1420676518. The article has also been posted with this problem set. Please use supply-demand analysis to explain the phenomena that the air fares could be different for the same route with different directions. You might want to discuss the reasons behind the high demand for a selected originating market, price elasticity of demand might also help in explaining the high price of a specific direction. Further online search and study about differential airline pricing for the same route is encouraged.

Airline Fare Riddle: One Route, Two Prices - WSJ Page 1 of 4 This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers visit

 

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http://www.wsj.com/articles/airline-fare-riddle-one-route-two-prices-1420676518 THE MIDDLE SEAT Airline Fare Riddle: One Route, Two

 

Prices

 

It?s the Same Round-Trip, but the Fare Depends on Which Direction

 

You?re Traveling

 

By SCOTT MCCARTNEY

 

Jan. 7, 2015 7:21 p.m. ET There seems no end to ways airfares can confound and frustrate travelers.

 

Airlines charge different prices for the same trip depending on which direction

 

passengers are flying. For example, the average price paid for tickets on Los AngelesHonolulu round-trips was $614 if the trip originated in Los Angeles, 7.5% more

 

expensive than the $571 average-ticket price if you started in Honolulu. That is among

 

the findings of a study conducted for The Wall Street Journal by Airlines Reporting

 

Corp., which processes tickets for online and traditional travel agencies.

 

International flights had the biggest directional price differences. Between New York and

 

London, travelers paid $2,507 on average if they started in New York and $1,672 if they

 

began the trip departing from London, an $835, or 50%, boost. Between New York and

 

Tel Aviv, people leaving from the U.S. paid $354, or 28%, more on average than people in

 

Israel?$1,618 if the round-trip began from New York?s Kennedy Airport versus $1,264 if

 

the trip started at Tel Aviv.

 

In theory, just as many passengers are traveling back and forth between any pair of cities.

 

Travelers who head to Hawaii from Los Angeles are also competing for seats on return

 

flights home from Honolulu. And there isn?t any cost difference to the airlines for the

 

round-trip no matter which direction is flown first. http://www.wsj.com/articles/airline-fare-riddle-one-route-two-prices-1420676518 9/17/2015 Airline Fare Riddle: One Route, Two Prices - WSJ Page 2 of 4 ?I think the U.S.

 

consumer is being

 

gouged by the airlines,

 

but it?s the nature of

 

commerce,? said Guy

 

Millo, chief executive

 

officer of Da?at

 

Educational Expeditions,

 

which organizes group

 

tours in Israel and has

 

offices there and in the

 

U.S. ?There?s no way a

 

28% price difference

 

between New York and

 

Tel Aviv can be

 

attributed to fewer

 

travelers on a round-trip

 

route. Travelers go both

 

ways.? Mr. Millo, who travels regularly between the U.S. and Israel, has personally taken

 

advantage of the pricing difference. Six years ago he used frequent-flier miles to go one

 

way to Israel. Now all his round-trips back and forth are ticketed with departures from

 

Tel Aviv rather than New York. The scheduling gets complicated, but the savings is

 

significant. In November, he flew on a $3,200 round-trip Delta Air Lines business-class

 

ticket, but the same flights would have been at least $5,500 if he had started in New

 

York.

 

American Airlines, Delta

 

and United Airlines all

 

say directional

 

differences result from

 

simple supply-anddemand pricing. If there

 

are more people in New

 

York going to London

 

than the other way, airlines can fill seats at higher prices with New York passengers.

 

?It comes down to demand in each originating market,? said a spokesman for American. http://www.wsj.com/articles/airline-fare-riddle-one-route-two-prices-1420676518 9/17/2015 Airline Fare Riddle: One Route, Two Prices - WSJ Page 3 of 4 Some cities have more buyers of last-minute tickets at higher prices, which drives up the

 

average for tickets sold in one direction over another, a Delta spokesman said. New

 

Yorkers may tend to book closer to departure than Londoners, for example, and end up

 

paying more. ?We look at all of our pricing very, very closely and if there?s enough

 

demand to maintain that price,? the spokesman said.

 

A United spokesman said holiday travel periods drive demand directionally, pushing

 

fares higher. ?There may be fewer deeply discounted seats available on preholiday

 

Hawaii-bound flights because of the increased demand by mainland travelers,? he said.

 

Supply and demand drives almost all airfare peculiarities, said Scott Nason, a former

 

airline-pricing executive who now consults with companies on revenue management.

 

That is why short trips can be more expensive than long trips, and today?s cheaper fuel

 

costs don?t necessarily translate into lower ticket prices. Since airline pricing was

 

deregulated in 1979, carriers haven?t priced tickets according to their costs, unlike

 

grocery stores and gas stations. They try to get the most revenue out of each flight based

 

on what people are willing to pay, Mr. Nason said.

 

For the fare analysis, Airlines Reporting Corp., or ARC, studied average pricing based on

 

direction of travel on more than 6.8 million tickets sold for the U.S. domestic and

 

international markets between Jan. 1, 2013 and July 31, 2014. The study included the 10

 

most popular routes for domestic travel and 10 for international flights into and out of

 

the U.S. ARC used data from its global-ticketing database, which includes both U.S. and

 

foreign travel agencies but not data for ticket sales on airlines? own websites.

 

On the top 10 domestic markets, the average price variation by direction was just $18, or

 

3.5% of the ticket price. Atlanta-New York was typical, with average prices from New

 

York La Guardia Airport at $474 and average prices originating in Atlanta at $456.

 

Between New York and Los Angeles, average prices varied by just 2%.

 

?The U.S. market appears to be a lot more homogeneous than we thought,? said Chuck

 

Thackston, ARC?s managing director of enterprise information management.

 

The biggest domestic differences were found in leisure markets such as Honolulu, Las

 

Vegas and Orlando, Fla. Demand comes heavily from one end of the trip over the other,

 

and travelers often pay higher fares for peak-time flights.

 

Travelers pay a premium for flights to leisure destinations on Friday evenings, for

 

example, and returning home on Sunday nights. Flights in the other direction at peak

 

vacation times may be less-heavily booked, so people who live in leisure destinations can

 

take advantage of cheap prices while people going in the other direction are paying high

 

prices, Mr. Nason said. http://www.wsj.com/articles/airline-fare-riddle-one-route-two-prices-1420676518 9/17/2015 Airline Fare Riddle: One Route, Two Prices - WSJ Page 4 of 4 ARC found larger pricing differences on the top 10 international routes involving the U.S.

 

Seven of the 10 busiest international markets were more expensive traveling from the

 

U.S., while the others were more expensive for flights originating abroad.

 

Airlines say their prices vary between countries, which is why airline websites often ask

 

travelers to identify their country when they first begin shopping for fares. A weak

 

economy in a particular country might prompt airlines to offer lower prices to stimulate

 

travel from that location, while not offering those prices on the same route in the

 

opposite direction, Mr. Nason said. Currency fluctuations can also impact pricing?a

 

strong dollar can make U.S. airline tickets more expensive overseas when sold in local

 

currencies, unless airlines lower prices to keep up sales.

 

American?s nonstop flights between Dallas-Fort Worth and Madrid were priced Tuesday

 

at $1,256 round-trip for late January when originating in Texas, for example, but only

 

$684 round-trip for flights starting in Spain on the same dates.

 

American said the low price offered for trips starting in Madrid are the result of a fare

 

sale that is only available from European points of origin.

 

In Israel, Mr. Millo says travelers headed for New York are willing to make a stop in

 

Europe to get lower fares. U.S. travelers prefer the convenience and perceived safety

 

advantages of nonstop, direct flights, he said. That forces airlines to offer lower prices in

 

Israel to better compete against European airlines on the New York-Tel Aviv route.

 

Write to Scott McCartney at [email protected] Copyright 2014 Dow Jones & Company, Inc. All Rights Reserved

 

This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For

 

non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com. http://www.wsj.com/articles/airline-fare-riddle-one-route-two-prices-1420676518 9/17/2015

 







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