In a recent fare war, America West reduced the price of its ...

[mrsjacobs44]

In a recent fare war, America West reduced the price of its roundtrip airfare from Charlotte, North Carolina, to New York City from 198 to 138 to match American Airlines. America West matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for less. American, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. What different assumptions about the underlying price elasticity of demand for airline tickets on that route did each airline believe true?

Question 2

In the long run, a sustained increase in money supply growth relative to the growth rate of potential real output will most likely:
 a. cause the nominal interest rate to fall.
 b. cause the real interest rate to fall.
 c. reduce the natural rate of unemployment.
  d. none of the above

[beccamahon]

Answer to Question 1

America West must have believed demand in this price range to be inelastic, so that a fare cut would lead to a relatively small increase in quantity demanded. American must have believed the opposite: that the fare cut would stimulate a more than proportional, or elastic, consumer response.

Answer to Question 2

d

[mrsjacobs44]

Gracias!

[mohan]

Excellent