ECO201: Consider a Tourism-dependent Economy Where the Air Travel Industry is Affected: Managerial Economics Assignment, SUSS, Singapore

Question 1

(a) Consider a tourism-dependent economy where the air travel industry is affected by two incidents that occur concurrently. One incident is the economy runs into a recession and unemployment had increased significantly. Another incident is the strike by pilots after the collapse of discussions between the pilot unions and airline management.

Discuss with suitable air travel market diagrams the effects of these two incidents on the equilibrium price and quantity of the air travel market. Your diagrams should reflect the correct shapes of the demand and supply curves based on their price elasticities. (Note: you do not need to consider possible impacts of the COVID-19 pandemic in your analysis.)

(b) By considering the determinants of the price elasticity of demand, explain whether the demand for air travel is price elastic or price inelastic. You may consider both the business travelers and leisure travelers when analyzing their price elasticities of demand.

(c) Discuss in the context of the income elasticity of demand for air travel, the effect on the revenue of airlines given that there is a large decrease in the income of consumers. Does your answer depend on the price elasticity of demand for air travel? Explain using a suitable air travel market diagram.