Mathematical Economics (ECO406) Assignment No 1 Solution Fall 2014

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Mathematical Economics (ECO406) Assignment No 1 Solution Fall 2014 DUE DATE: 27th November, 2014



Airline industry is a large and growing industry. It accelerates economic growth, world
trade, international investment and tourism and is therefore, central to the globalization.
The airline industry is always dependent on prevailing market conditions. There are lots
of factors which affect the passenger’s demand for air line’s travel; increase in its prices
of tickets, oil price, and terrorist throughout the year. Furthermore, market competition
and other modes of traveling (substitutes) in market like train, car etc. also affect demand
of airline tickets. If the demand and supply equations for airline tickets are:
Qs= 200+800P
Qd=2000-400P
Requirement:
a) Find the market clearing quantity and price of airline tickets, also show the
equilibrium condition graphically.
b) Find out the price elasticity of demand and price elasticity of supply of airline
tickets at equilibrium price and quantity.
c) What will be the effect on the equilibrium level of airline tickets if ticket prices
increases due to high fuel prices. Illustrate graphically
(Marks: 5+3+3)
Part B:
People travel through air lines for different purposes, like businessmen travel for
business purpose and tourists for entertainment. Elasticity of demand is different
for both types of travelers. Suppose that business travelers and tourists have the
following demand for airline tickets from Lahore to Karachi.

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Requirements:
a) Find the elasticity of demand when price of airline’s tickets rises from $150
to $200 for business travelers and tourists.
b) Discuss the variation in elasticity of demand results in part “a” for both types
of travelers.
(Marks: 6+3)
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