Southwest Airlines is a major carrier based in Texas, and has made a strategy of cutting fares drastically on certain routes with large effects on air traffic in those markets. For example on the Burbank-Oakland route the entry of Southwest into the market caused average fares to fall by 48% and increased market revenue from $21,327,008 to $47,064,782 annually. On the Kansas City-St Louis route, however, the average fare cut in the market when Southwest entered was 70% and market revenue fell from an annual $66,201,553 to $33,101,514.
1) Calculate the price elasticity of demands (PEDs) for the Burbank-Oakland and Kansas City-St Louis routes.
2) Explain why the above market elasticities might not apply specifically to Southwest.
3) If Southwest does experience a highly elastic demand on the Burbank-Oakland route, what is the profit implication of this?
4) Explain why the fare reduction on the Kansas City-St Louis route may still be a profitable strategy for Southwest.
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