MBAA523 Full Course – Discussion and Assignments – 2016 April

MBAA 523 Module 1.4 Discussion

1.4 – Discussion: Applying the Porter Model to the
Airline Industry

77 unread replies.3838 replies.

The goal of the Discussion Board is to share concepts,
theories, ideas, and to learn from the collective knowledge and experience of
your peers and instructor. Critical thinking is a valued trait in all career
fields and these discussions give you an opportunity to focus on managerial and
airline economic topics and practice your critical thinking and communicating
skills.

In this discussion forum, address the following:

• Choose
  one of Porter’s five forces.
• Discuss
  the characteristics of the airline industry within this framework.
• Does
  your selected market force result in higher or lower airline profits?

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the
Discussion Rubric for detailed grading criteria.

Note:Discussion rubrics may be accessed by selecting
the gear icon above and choosing “show rubric” from the drop-down
menu.

MBAA 523 Module 2.3 Discussion

2.3 – Discussion – Air Travel Demand

3333 unread replies.4141 replies.

Reminder: The purpose of the discussion activities is to
share your insights with your classmates.

In this discussion forum, address the following:

• What
  are the factors that drive the demand for air travel?
• What
  is the prospect for long-term travel growth?

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module.

Review the Discussion Rubric to find out how to maximize
your grade.

MBAA 523 Module 3.3 Discussion

3.3 – Discussion: Airline Response to Recession

26 26 unread replies. 39 39 replies.

The goal of the discussions is to share concepts, theories,
ideas, and to learn from the collective knowledge and experience of your peers
and instructor. Critical thinking is a valued trait in all career fields and
these discussions give you an opportunity to focus on managerial and airline
economic topics and practice your critical thinking and communicating skills.

discussion_forum.jpgIn this discussion forum, address the
following:

In 2008, the world entered the worst recession since the
Great Depression of the 1930s. What would you predict for airline supply and
demand?

Review US airline industry demand and supply data from the
US Bureau of Transportation Statistics. Explain in terms of supply and demand
how the US domestic airline industry reacted to the recession. You may wish to
explain only one aspect of the US airline response to the recession such as
supply, demand, or pricing.

Data source: The US Bureau of Transportation Statistics
supplies a wealth of airline data.

For this project, you will find a customizable data table at
Research and Innovative Technology Administration, or
http://www.bts.gov/xml/air_traffic/src/index.xml#CustomizeTable (Links to an
external site.).

Customize your data by selecting: 1. From 2007 until the end
of the recession or to an end point of your interest, 2. Domestic, 3.
Scheduled, and 4. Passengers, then select the statistics of interest (scroll to
the bottom for selection criteria).

Prices are, of course, another piece of this puzzle. RITA
provides a table of national fares. Find these under Data and Statistics/Air
Fares Data/National Level Fares since 1995. Use the quarterly data, U.S.
Average (Inflation-Adjusted $).

A few airline terms will be helpful. Airline supply is
usually measured in Available Seat Miles (ASM). Measures of demand are Revenue
Passenger Miles (RPM) and Enplanements. Passenger Load Factor is yet another
indication of demand. Should you ever wish to do more research, perhaps for the
GCP, the BTS has all the airline statistics you will probably ever need.

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the Discussion
Rubric to find out how to maximize your grade.

MBAA 523 Module 4.3 Discussion

4.3 – Discussion: Low Cost Carriers

66 unread replies.3737 replies.

The goal of the Discussion Boardis to share
concepts, theories, ideas, and to learn from the collective knowledge and
experience of your peers and instructor. Critical thinking is a valued trait in
all career fields and these discussions give you an opportunity to focus on
managerial and airline economic topics and practice your critical thinking and
communicating skills.

In this discussion forum, address the following:

• Choose
  one element of archetypal low-cost-carrier business model (see Doganis,
  Chapter 6). Explain how it reduces cost compared with a large
  international network airline.
• Why do
  global network carriers not incorporate this element in their business
  model?

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the
Discussion Rubric to find out how to maximize your grade.

MBAA 523 Module 5.3 Discussion

5.3 – Discussion – Passengers’ Wants in Air Travel

99 unread replies.4343 replies.

The goal of the Discussion Boardis to share concepts, theories,
ideas, and to learn from the collective knowledge and experience of your peers
and instructor. Critical thinking is a valued trait in all career fields and
these discussions give you an opportunity to focus on managerial and airline
economic topics and practice your critical thinking and communicating skills.

In this discussion forum, address the following:

• What
  do passengers want in airline service?
• Can an
  airline satisfy the wants of all passengers?

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the
Discussion Rubric to find out how to maximize your grade.

MBAA 523 Module 6.3 Discussion

6.3 – Discussion: Pricing Strategies

1818 unread replies.4141 replies.

Consider three different flights: A Monday morning flight from Chicago (ORD) to
New York (LGA) with very high demand by business passengers; a mid-morning
flight from St. Louis (STL) to LAX with moderate demand from both business and
leisure passengers; and a regional jet flight from Columbia, S.C (CAE) to
Atlanta (ATL) with connections to all major cities on mainline jets (the RJ has
cost per available seat mile twice that of mainline jets). The three applicable
pricing models are peak pricing, 3rd degree price discrimination, and cross
subsidization.

In this discussion forum, address the following:

Choose one flight and explain how one of the models applies
to pricing.

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the
Discussion Rubric to find out how to maximize your grade.

MBAA 523 Module 7.3 Discussion

7.3 – Discussion: New Carrier Entry

2222 unread replies.4040 replies.

A smaller network carrier (hub and spoke airline) is
considering expanding its product by adding a new route connecting its hub with
the “fortress hub” of a global network carrier (see Doganis sections 9.6 &
9.7).

In this discussion forum, address the following:

Choose any one of the topics from Baye/Prince Chapter 13 and
discuss its applicability to the entry decision.

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the Discussion
Rubric to find out how to maximize your grade.

MBAA 523 Module 8.3 Discussion

8.3 – Discussion: Increased Competition

1616 unread replies.3737 replies.

With DHL promising increased competition in the US express
package (integrated carrier) industry, various stakeholders would greet this
prospect quite differently.

In this discussion forum, address the following:

• Choose
  one of these stakeholder groups and explain from their perspective why you
  oppose or support the entry of DHL in the US domestic market:
  • Federal,
    state and/or local government
  • FedEx
    and UPS management and employees
  • DHL
    management and employees
  • Labor
    unions and package shippers
• Use
  the theories of various market structures to support your postings.

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the
Discussion Rubric to find out how to maximize your grade.

MBAA 523 Module 9.3 Discussion

9.3 – Discussion: Airfreight

3636 unread replies.4545 replies.

Air China is regularly selling out the cargo belly hold
capacity on its scheduled Beijing to Los Angeles passenger flights.

In this discussion forum, address the following:

• Air
  China is considering leasing a Boeing 747-400 freighter (originally a
  passenger aircraft, but converted to all- cargo) to provide more cargo
  capacity on this route. What is your advice?
• There
  are many aspects to this question ranging from additional needed
  information to supply, demand, cost, and pricing. You may address one or
  more aspects as desired.

Remember to respond to at least two of your peers’ postings.
This is a graded activity due on the last day of the module. Review the
Discussion Rubric to find out how to maximize your grade.

MBAA 523 Module 1.5 Assignment Problem Set 1

1. An airline is considering the purchase of an Airbus
A-320neo which offers improved fuel efficiency over the previous generation of
narrow-body aircraft. The finance department estimates the aircraft will
generate a positive net cash flow of $6 million in the first year increasing by
5% annually owing to the aircraft’s fuel efficiency. The airline plans to
operate the aircraft for 15 years, then selling it in year 16 for an estimated
net cash price of $30 million. The airline targets a return on invested capital
of 12% annually (use this rate rather than the interest rate to discount future
cash flows). What is the maximum price the airline should be willing to pay for
a new A-320neo? Note: This computation is easiest to perform using MS Excel.
The Excel computations may be copied and pasted into MS Word.

2. Complete the following table and answer the accompanying
questions. Note: This computation is best completed in MS Excel. Copy and paste
the resulting table into this Word document.

A. At what level of the control variable are net benefits
maximized?

B. What is the relation between marginal benefit and
marginal cost at this level of the control variable?

3. Approximately 90,000 students per year apply to the top
MBA programs.

C. Using the concept of net present value and opportunity
cost, explain when it is rational for an individual to pursue and M.B.A.
degree.

D. What would you expect to happen to the number of
applicants if the starting salaries of managers with an M.B.A. degree remained
constant but the salaries of managers with bachelor’s degrees increased by 15%?
Why?

4. A small airline recently sold to a private equity group
for $145 million. The airline has earned profits of $9 million last year. The
new managers believe they can grow profits at 5% per year. The private equity
group borrows money from wealthy individuals to invest in acquisitions. Because
of the significant risk involved, lenders are promised a 12% return on their
loans to the equity group. Is the purchase price of the new airline reasonable?
Explain.

MBAA 523 Module 2.4 Assignment Problem Set 2

MBAA 523
Problem Set 2

The popular and financial press regularly report on economic
events, but the description is usually quite different from the theoretical
model provided in a microeconomics textbook. This problem set provides an
opportunity to practice supply and demand analysis using excerpts from articles
published in the Wall Street Journal.

For each of the following 12 economic circumstances, show
the shift of supply and/or demand curves; use an arrow to show the shift in the
curves, the change in price and the quantity demanded. To insert lines and
arrows in MS Word, click on “Insert” on the upper menu bar. Next, click the
drop down menu under “Shapes.” Select the shape you’d wish to insert, then use
the mouse to insert the line or arrow into the graph.

Below the graphical analysis, write a short explanation
explaining your analysis. Here’s an example of the graphical analysis:

This example shows an increase in the demand curve, perhaps
as a result of an increase in income. The shift in the demand curve leads to a
higher price and quantity demanded. For each problem, explain why the curve(s)
shifted.

Problem 1 – Conflict fears drive up crude prices.

A military conflict forces the shut-down of major crude oil
pipeline. World oil prices soared to an 18 month high. Show the effects in the
crude oil market.

Explanation:

Problem 2 – Egypt’s Gaza Crackdown Hammers Economy

An aggressive crackdown by Egypt’s interim government on
smuggling tunnels between Egypt and the Gaza Strip is crushing the Palestinian
enclave’s economy, sparking concerns it could fuel a militant backlash. To get
around the blockade, Gazans smuggle goods, and the tunnels’ closure has sent
prices soaring in the past three weeks. Many Gazans now buy the Israel-shipped
fuel for seven shekels ($2) a liter — more than twice as much as that smuggled
from Egypt. The cost of cement, another major smuggled item, has reached $1,500
a ton from $1,000, said Ahmad Abdul-Rahman, a merchant. Show the effects in the
Gaza market for goods and services.

Explanation:

Problem 3 – Dutch Economy Faces Stagnation

The Albert Cuyp market here, famous for its offerings of
cheap clothing and exotic foods, is one of the busiest in the Netherlands. But
while it still attracts plenty of shoppers, customers are increasingly wary of
spending their money there, said Nicolas Steur, a 50-year-old fishmonger.
Revenue at his stall, where he sells fresh haddock, raw herring and other
seafood, has fallen by 20% compared with four years ago. “We still have
about the same amount of customers,” Mr. Steur said. “But they spend
less money. People are cutting down on their expenses.” Show the effects in
the Albert Cuyp market.

Explanation:

Problem 4 – Farmers Opt to Dump Supplies as Weather Forecast
Dashes Hopes for Price Jump.

U.S. soybean supplies have been tight since last year’s
severe drought cut production. Many farmers held some of last year’s soybeans
in storage, waiting to see if they could sell them at a higher price this
summer, when supplies are tightest before the next harvest. This week, many of
those farmers decided it was time to sell. Weather conditions for this year’s
U.S. crop are mostly favorable, which means a large harvest this fall could
push prices lower. Historically high cash prices for soybeans early this week
also lured farmers to start selling. The result has been a collapse in cash
markets over the past two days. Show the effects of the changes in the last two
days.

Explanation:

Problem 5 – China lures the world’s pilots.

The rising middle class in China means millions more people
are taking to the skies. There’s a tsunami of retirement which is now under way
in the airline industry. Chinese airlines have raised their pay offers to
foreign pilots by up to 30% in the past 18 months. Show the effects in the
global pilot labor market.

Explanation:

Problem 6 – Companies unplug from grid, delivering a jolt to
utilities.

On a hill overlooking the Susquehanna River, two big wind
turbines crank out electricity for Kroger Co.’s Turkey Hill Dairy in rural
Lancaster County, Pa., allowing it to save 25% on its power bill for the past
two years. Show the effect on the public electric utility company.

Explanation:

Problem 7 – Rising oil prices.

Rising oil prices cause airlines to adjust flight schedules.
Show the effect on airline prices and quantity demanded.

Explanation:

Problem 8 – Federal Aviation Administration increases
minimum pilot qualifications.

Regional airlines are concerned that higher flight hour
requirements for new pilots will increase costs. Show the effect on passenger
ticket prices and quantity demanded.

Explanation:

Problem 9: Europe levies new tax on airline tickets.

A new tax on airline tickets has raised concerns the
European airline traffic will fall. Show the effect on airline ticket prices
and quantity demanded.

Explanation:

Problem 10 – More Doctors Steer Clear of Medicare

Fewer American doctors are treating patients enrolled in the
Medicare health program for seniors, reflecting frustration with its payment
rates and pushback against mounting rules, according to health experts — just
as millions of Americans are poised to gain access to such coverage under the
new health law next year. Some Americans may have difficulty finding doctors
who will take their new benefits or face long waits for appointments with those
who do. Some experts attribute the rise in defections to Medicare payment rates
that haven’t kept pace with inflation and the threat of more cuts to come.
Under a budgetary formula enacted by Congress in 1997, physicians could see
Medicare reimbursements slashed by 25% in 2014 unless Congress intervenes to
delay the cuts, which it has done several times. Show the effects on Medicare
patients. Hint: Note that some patients may have trouble finding doctors.

Explanation:

Problem 11 – Wage-Rise Report Sees Fewer Jobs, Less Poverty

President Barack Obama’s quest to raise the federal minimum
wage to $10.10 an hour would eliminate about 500,000 jobs by 2016 but increase
pay for millions of Americans and lift nearly a million out of poverty, a
Congressional Budget Office report found. Analyze the labor market with a
minimum wage of $10.10 per hour.

Explanation:

Problem 12 – Rent Control

Many of the proponents of price ceilings argue that
government-mandated maximum prices, such as rent controls in New York City,
simply reduce producers’ profits and do not affect the quantity supplied of a
good on the market. If the relevant supply and demand curves are as pictured
below, show whether this belief is correct.

Explanation:

Problem 13 – Price Controls

Rent controls limit the rent to Pc. Show the Lost Social
Welfare (known as Deadweight loss). You can do so by inserting the curve shape
which can be drawn around the deadweight loss.

Explanation:

Problem 14 – Supply and demand

Suppose demand and supply are given by Q^d= 50 – P
and Q^s= 1/2P – 10.

A. What the equilibrium quantity and price in this market?

B. Determine the quantity demanded, the quantity supplied,
and the magnitude of the surplus if the price floor is $42 is imposed on this
market.

C. Determine the quantity demanded, the quantity supplied,
and the magnitude of the shortage if a price ceiling of $30 is imposed on this
market.

Problem 15 – Supply

Suppose the supply function for product X is given by Q^s_x=
-50 + 0.5P_x– 5P_z.

A. How much of product X is supplied when P_x=
$500 and P_z= $30?

B. How much of product X is supplied when P_x=
$250 and P_z= $10?

MBAA 523 Module 3.4 Assignment Problem Set 3

1. If the price for some good increases by 10% and the
quantity demanded falls by 5%, (a) what is the price elasticity of demand, and
(b) is this elastic or inelastic?

2. Last year the US low-cost-carrier Spirit Airlines entered
the Dallas-Chicago market. The average ticket price for all airlines servicing
the route fell from $200 to $180. After Spirit’s entry, the number of
passengers increased from 700 to 800 per day (these number are hypothetical,
but reasonable). Calculate the price elasticity of demand between these two
points. Show the computation.

3. An airline consulting firm as determined that the income
elasticity for leisure air travel in China is 1.5. If incomes increase by 5%
next year, what is the percentage change in leisure passengers expected next
year? Show the computation.

4. The state operates a toll road which currently charges
$1.00 per car with 100,000 cars using the road daily. The state wishes to raise
an additional $10,000 per day for road maintenance. A newly hired financial
analyst proposes raising the toll to $1.10 per car. The analyst reports to you.
Will you accept and forward her recommendation to your boss?

5. The demand curve for a product is given by Q^d_x=
1,000 – 2P_x+.02P_zwhere P_z= $400. (Hint: If
you’re not comfortable with the calculus alternatives, compute Q at the given
prices, then again with a 1% increase in price. Then figure percentage change
in Q over the percentage change in P, %?Q/%?P).

a. What is the own price elasticity of demand when P_x=
$154? Is the demand elastic or inelastic? What would happen to the firm’s
revenue if it decided to charge a price below $154?

b. What is the own price elasticity of demand when P_x=
$354? Is the demand elastic or inelastic? What would happen to the firm’s
revenue if it decided to charge a price below $354?

c. What is the cross-price elasticity of demand between good
X and good Z when P_x= $154? Are good X and good Z substitutes are
complements?

6. The data are real US Gross Domestic Product (in billions
of dollars) and Domestic Revenue Passenger Miles (in millions) for the years
1996 through 2012. Below this table is the MS Excel Summary Output regressing
RPMs against GDP. Using MS Excel or another similar application, build a
scatter plot and insert the regression line and equation. Next, interpret the
regression output and explain the regression statistics. Be certain that the
regression coefficients match those in the scatter plot equation. Finally, use
the regression equation to predict RPMs for 2013 and 2014 assuming GDP grows by
3% each year from 2012. You may wish to check the actual RPMs to see how
closely your estimate matched. Note: To build a scatter plot in Excel, select
and copy the GDP and RPM data into Excel; select the data in Excel, then use
Insert/Scatter to create a scatter plot. Finally, scroll down Chart Layout to
select the format that creates a regression line and formula. Use the Excel
Help function as needed.

 

MBAA 523 Module 4.4 Assignment Problem Set 4

1. Define the short-run and long-run and provide an aviation
example.

2. In the short-run, Airbus manufactures aircraft at its
existing factories; however, labor and other inputs such as those components
purchased from suppliers (engines are one example) are variable. Airbus has
received a substantial number of new orders and will increase its monthly
aircraft production rate. Explain why the MP_Lwill decrease above
some level of labor as more workers are added. How does this decrease in MP_Lresult
in an increase in MC?

3. The table shows the marginal product of labor for a manufacturing
firm in the short-run. The cost of an additional worker is $100 per day
including benefits. The product sells for $2 per unit. Compute the value of the
marginal product of labor. How many workers will the firm hire?

4. NEW DELHI — Each fall at harvest time, Leela Dhar Rajput
used to hire 25 farm hands to work from dawn to dusk every day for a week
bringing in the rice crop on his 20 acres of land in the central Indian state
of Madhya Pradesh. This year, he plans to use a combine harvester instead. With
the machine and the help of two or three men, he expects to finish the job in a
single day. Indian agriculture is belatedly engaged in a mechanical revolution,
boosting productivity in a sector that has long relied on cheap, surplus labor
to tend crops in the world’s second most populous country. Job opportunities in
factories and services, plus the government’s rural job-creation program
guaranteeing 100 days of employment a year on public-works projects, have
drained the pool of workers in villages. “I just can’t find enough people
to do the hard work in the fields anymore,” says Mr. Rajput. [Mukherji, B.
(2013, October 29). India’s Farmers Mechanize. WSJ, B8.]

Show and label the amount of capital (K) and labor (L) employed
with the displayed isocost line and then insert a new isocost reflecting a
substantial increase in the price of labor. Mr. Rajput intends to harvest the
same quantity of rice as last year. Show and explain the effect on the K and L
employed.

5. Complete the table (the easiest method is to do the
computation in MS Excel). Create a line graph of AFC, AVC, ATC, and MC (in
Excel, select the 4 columns, then Insert/Line, and choose the first graph
option). Explain the reason for the shape of each curve. The completed table
and graph can be copied and pasted into this document. Hint: Be certain that
your line graph looks similar to those in Baye (your graph will not be as
smooth as in Baye). If not, there is likely an error in your computations.

6. Define economies of scale. Is there evidence of economies
of scale in the airline industry? (Hint: Consider Low-Cost-Carriers). In large
commercial aircraft manufacturing?1. Define the short-run and long-run and
provide an aviation example.

2. In the short-run, Airbus manufactures aircraft at its
existing factories; however, labor and other inputs such as those components
purchased from suppliers (engines are one example) are variable. Airbus has
received a substantial number of new orders and will increase its monthly
aircraft production rate. Explain why the MP_Lwill decrease above
some level of labor as more workers are added. How does this decrease in MP_Lresult
in an increase in MC?

3. The table shows the marginal product of labor for a
manufacturing firm in the short-run. The cost of an additional worker is $100
per day including benefits. The product sells for $2 per unit. Compute the
value of the marginal product of labor. How many workers will the firm hire?

4. NEW DELHI — Each fall at harvest time, Leela Dhar Rajput
used to hire 25 farm hands to work from dawn to dusk every day for a week
bringing in the rice crop on his 20 acres of land in the central Indian state
of Madhya Pradesh. This year, he plans to use a combine harvester instead. With
the machine and the help of two or three men, he expects to finish the job in a
single day. Indian agriculture is belatedly engaged in a mechanical revolution,
boosting productivity in a sector that has long relied on cheap, surplus labor
to tend crops in the world’s second most populous country. Job opportunities in
factories and services, plus the government’s rural job-creation program
guaranteeing 100 days of employment a year on public-works projects, have
drained the pool of workers in villages. “I just can’t find enough people
to do the hard work in the fields anymore,” says Mr. Rajput. [Mukherji, B.
(2013, October 29). India’s Farmers Mechanize. WSJ, B8.]

Show and label the amount of capital (K) and labor (L) employed
with the displayed isocost line and then insert a new isocost reflecting a
substantial increase in the price of labor. Mr. Rajput intends to harvest the
same quantity of rice as last year. Show and explain the effect on the K and L
employed.

5. Complete the table (the easiest method is to do the
computation in MS Excel). Create a line graph of AFC, AVC, ATC, and MC (in
Excel, select the 4 columns, then Insert/Line, and choose the first graph
option). Explain the reason for the shape of each curve. The completed table
and graph can be copied and pasted into this document. Hint: Be certain that
your line graph looks similar to those in Baye (your graph will not be as
smooth as in Baye). If not, there is likely an error in your computations.

6. Define economies of scale. Is there evidence of economies
of scale in the airline industry? (Hint: Consider Low-Cost-Carriers). In large
commercial aircraft manufacturing?

MBAA 523 Module 5.4 Assignment Problem Set 5

1. For each of the following market structure
characteristics, insert the correct Market Type(s). There may be more than one.
Use these abbreviations: PC – perfect competition; MC – monopolistic
competition; and M – monopoly.

2. Assume a perfectly competitive market structure. Complete
the diagram to show the profit maximizing price and quantity. Label each (use
Insert textbox). Is the firm earning economic profits or losses? If so, what
will occur over the long-term?

3. A firm sells its product in a perfectly competitive
market where other firms charge a price of $80 per unit. The firm’s costs are
C(Q) = 40 + 8Q + 2Q². Show your computations.

a. How much output should the firm produce in the short-run?

b. What price should the firm charge in the short-run?

c. What are the firm’s short-run profits?

d. What adjustments should be anticipated in the long-run?

4. Complete the diagram showing the profit maximizing price
and quantity. Label each. Show and label the deadweight loss (In MS Word, use
Insert/Curved Connector, a curved line).

5. A firm is a monopoly with demand and cost functions given
by P = 200 – 2Q and C(Q) = 2,000 + 3Q²respectively. Show your
computations.

a. Show the equations for MR and MC.

b. Compute the profit maximizing quantity.

c. What is the price at the profit maximizing quantity?

d. Compute total revenue.

e. Compute total cost.

f. What are the profits?

MBAA 523 Module 6.4 Assignment Problem Set 6

1. You compete with many firms offering similar products
(monopolistic competition). An economic consulting firm has estimated the
own-price elasticity for your most profitable product is -1.50. Your marginal
cost is constant at $75 across most of your production volume capability. What
price will maximize profits? Show the computation.

2. Define the 3 types of price discrimination and explain
why 1^stdegree discrimination is very difficult to practice. Provide
1 example where a form of 1^stdegree discrimination is practiced.

3. Complete and label the diagram showing the numbers of
seats sold and price for leisure and business passengers. Answer the following
questions:

a. If the price of fuel increases modestly, will fares
increase?

b. Are all seats sold? If not, wouldn’t the airline make
more money by selling more seats at a lower price?

4. Explain the conditions necessary for a firm to practice 3^rddegree
price discrimination and using airline conditions as examples.

5. Wall-Mart offers to match the price of any competitor.
Why is this guarantee not necessarily a benefit to consumers?

MBAA 523 Module 7.4 Assignment Problem Set 7

MBAA 522

Problem Set 7

1. Between 1995 and 1997, American Airlines competed with
several low-cost-carriers on routes from Dallas/Fort Worth. The US Department
of Justice sued alleging predatory pricing. A judge disagreed. Read this
article from the Wall Street Journal (available through the Hunt Library
ProQuest database):

Wilke, J. R., & McCartney, S. (2001, April 30). American
Airlines secures antitrust win — Judge dismisses U.S. case, says competitive
moves were company’s right. Wall Street Journal(Eastern edition),
pp. A.3.

The antitrust legal standard for predatory pricing is
pricing below variable or marginal cost. Discuss why the plaintiffs lost this
case in the face of what most lay people would consider predatory pricing.
Hint: Consider how to compute marginal cost for an airline.

2. Most large airlines operate networks, or hub-and-spoke
systems, which connect many spoke cities (or nodes) with flights to and from a
hub airport.

a. A network carrier serves 39 spoke cities from a single
hub. How many city-pairs does it serve? (A city-pair is City A to City B. City
A to City B and City B to City A are consider just one city-pair)

b. This same airline adds a 40^thspoke city to its
network using a 100 seat capacity aircraft. On a flight from this 40^thspoke
to the hub, how many passengers, on average, does it need to attract to each
destination to achieve an 80% load factor?

c. How can a network airline profitably serve smaller cities
than a low-cost-airline? (Hint: Consider 2b above).

d. A network carrier serves some small cities close to its
hub with regional jets which have much higher seat-mile-costs (CASM) than
larger mainline jets. The average fare from these cities to the hub does not
cover fully allocated costs. Is this rationale?

e. Networks are subject to negative externalities. How might
such externalities affect a network carrier’s decision to add another spoke
city to its network? Explain. (You may wish to use marginal benefit/cost
analysis).

3. In the early 1990s, Airbus and Boeing were both
considering building a new Very Large Aircraft (VLA). Airbus faced this
decision tree. Boeing’s decision was similar. Why did only Airbus build the
VLA, the A-380? The numbers in parentheses indicate the 20 years incremental
profit in billions of dollars for Airbus and Boeing.

MBAA 523 Module 8.4 Assignment Problem Set 8

1. In oligopoly, each firm is acutely aware of the
production and marketing decisions of all competitors and carefully considers
the potential competitive reactions in all decisions. Discuss whether firms in other
market structures consider the potential reaction of competitors when making
important marketing decisions.

2. Part of the debate among economists on US airline
deregulation in the 1978 involved the theory of contestable markets. List the
four characteristics of contestable markets and evaluate how well airline
markets meet these criteria.

3. Price outcomes of the 5 oligopoly models differ
substantially. Which models produces the lowest and highest total profits (all
firms combined)? What are the predicted prices? Provide aviation industry
examples of routes or markets that might approximate each of these two
outcomes.

4. Oligopoly is the predominant market structure in the
airline industry. In the express package business, FedEx, UPS, and DHL compete in
the global air express industry. In the US, FedEx and UPS are a duopoly. FedEx
and UPS financial indicators such as net margin on sales and return on assets
are near the average for US companies. What oligopoly model does this suggest
and what characteristics of express package business would lead to this
outcome.

5. The mission statement for the Organization of Petroleum
Exporting Countries states, “the mission of the Organization of the Petroleum
Exporting Countries (OPEC) is to coordinate and unify the petroleum policies of
its Member Countries and ensure the stabilization of oil markets in order to
secure an efficient, economic and regular supply of petroleum to consumers, a
steady income to producers and a fair return on capital for those investing in
the petroleum industry.” Explain why the OPEC members often disagree on how
much petroleum each country should produce.

MBAA 523 Module 2.5 Written Assignment 1

MBAA 523

Written Assignment 1: Estimating Regional Air Transportation
Demand

The objective of this and the other written assignments in
the course is to show how the managerial economic theory and tools presented in
Baye are applied to a current airline industry problem. For this assignment,
the objective is to develop an appreciation for the methods used by the two
largest commercial aircraft manufacturers, Airbus (http://www.airbus.com) and
Boeing (http://www.boeing.com/), to forecast demand for air travel and the
market for commercial aircraft over the next twenty years. Fortunately, both
make their forecasts available to the public. For this assignment, you are to
review the Airbus Global Market Forecast and the Boeing Current Market Outlook.
These reports are available on the Boeing and Airbus websites. The location of
the forecasts varies from year to year but each can be accessed by a search
within the website or from the site map. In your review, concentrate on the
factors (independent variables) that Airbus and Boeing employ to estimate the
demand for air travel growth and how these are used to generate regional
estimates for specific aircraft types. First, look for sections in the reports
that provide an overview of the forecast methodology. Regression analysis is
used extensively, but the technical details are not provided or important for
this assignment. An appreciation for how the estimates are generated is
sufficient. After you look over the entire reports – they’re lengthy, it is not
necessary to read all sections – choose a region of the world for more detailed
study.

First, briefly explain how Airbus and Boeing develop their
20-year forecasts. Note the factors that influence projected air travel growth;
some factors affect the demand curves while others influence supply. Be certain
to distinguish between the two. The connection between the microeconomic theory
of supply and demand as presented in Baye and Doganis should be explicit. Then
explain the forecasts for growth in the chosen world region. Provide some
perspective to forecast growth in the rest of the world.

The paper should be approximately three pages not including
a cover page, reference list, and any appendices you may wish to include. Both
forecasts provide a wealth of detail that could support a much longer paper,
but the objective is an overview similar to an executive summary for one world
region, not an in-depth analysis. Managers are often tasked with analyzing
business environments or specific problems for senior management review. Senior
managers are usually pressed for time and value concise evaluation and
recommendation. Discerning and summarizing the critical facts succinctly is
difficult. More is not necessarily better; the page limit is intended to foster
this skill.

APA style is required including a title page and reference
listing. You may have only a few references, but these must be cited in both the
main body of the paper and in a separate reference list. An abstract and table
of contents are not required. The sample APA paper at the Purdue Online Writing
Laboratory provides an excellent overview of the APA style. Even if you believe
you have a good handle on APA format, a review is highly recommended. Be
certain to include APA elements such as running head, page numbers, headings,
source citations, introduction, and conclusion in your paper.

Page 1 of 1

MBAA 523

Written Assignment Standards

The standards for written assignments are as follows. These
standards will apply to all written assignments, unless otherwise indicated.

• Submit an original paper (one written by the student that
has not been previously submitted to fulfill a requirement for another course).

• Apply APA style rules; use the current edition of the APA
publication manual for guidelines. These rules affect any tables or charts,
citations, references, running head, page numbers, and section headings.

• Provide a title page containing the name of course, title
of paper, name of author, and date.

• Include a references page, if applicable, formatted to APA
style requirements.

• Observe written assignment formatting requirements: Times
New Roman font, 12-pt font size, double-spaced text, with numbered pages.

• The paper must be grammatically sound and free of spelling
errors. See the Resources area in the course for helpful writing skills
websites.

• Save your document as one of the following acceptable file
types: .doc, .docx, or

.rtf.

• If specified, adhere to the minimum/maximum page number
requirements as given in each assignment. Do not count the title page or the
references page(s) as part of the minimum total.

• You will be required to use quality resources. Typically,
this means that you should primarily use peer-reviewed journal articles. Note:
If using a website as a reference source, use only quality material. For
guidance, see Tips for Evaluating Websites from ERAU’s Hunt Library.

Additionally, review the evaluation rubric provided with
each written assignment activity for details on grading criteria.

MBAA 523 Module 4.5 Written Assignment 2

Assignment 2: Fleet Replacement Analysis

Revised 7/15

This assignment has three objectives, to: 1) become familiar
with the type and magnitude of mainline aircraft operating costs; 2) understand
the operating economics of new versus older aircraft; and, 3) learn how net
present value analysis is used in capital acquisition decision-making.

InselAir, a newer Caribbean airline based in Curacao, has
engaged the aviation consulting firm SH&E to evaluate whether it should
continue its fleet expansion with used McDonnell Douglas MD-80 aircraft or
purchase new Airbus A-320s. You are the senior financial analyst with SH&E
assigned to this project and will prepare a memorandum with your analysis and
recommendations to InselAir’s Chief Executive Officer Albert Kluyver.

Note: The assignment has detailed requirements similar to
those that would be given to a financial analyst. Be certain to read carefully
before beginning work.

Background

InselAir is the national airline of Curacao and in 2015
staked its claim to be “one of the best airlines in providing international
flexible connectivity to North and South America as well as the Caribbean
region” (fly InselAir.com). From hubs in Aruba, Bonaire and Curacao, InselAir
serves 27 destinations ranging from Charlotte in the US to Manaus and Quito in
South America. The fleet comprises 19 aircraft: 8 McDonnell Douglas MD-80s, 3
Fokker 70, 6 Fokker 50 and 2 Embraer Bandeirante. InselAir plans continued
fleet expansion.

Used MD-80 aircraft are available from several sources
including the large MD-80 fleets at American and Delta which are gradually
being replaced with new aircraft. US-based Allegiant Air has made used MD-80s
the backbone of its fleet having acquired 18 of its early MD-80s from
Scandinavian Airways System paying roughly $4 million dollars per plane in an
all cash transaction. InselAir believes it could also acquire MD-80s for its
expansion at similar prices. Though these aircraft are well used, service life
is still 15 or more years. As with all older aircraft, the MD-80 burns more
fuel and requires more maintenance than new generation aircraft of equal
mission capability. Volatile fuel prices have added to senior management’s
interest in evaluating new aircraft. As an alternative to the MD-80, Mr.
Kluyver is considering purchasing new Airbus A-320s.

The Analysis

SH&E has developed an Excel template which is provided
as an attachment for conducting your net present value analysis. You will need
to insert costs and performance figures into the template. You may wish to review
the template before reading further.

In order to complete your analysis, you will need to obtain
current aircraft operating data and prices from authoritative sources. The
sources listed below are sufficient and adequate for your project:

• Aircraft prices: Airbus publishes its aircraft list prices
periodically. Search the Airbus Industries website or simply do a Google search
for “Airbus aircraft list prices.”

• Aircraft performance data and operating costs: The Airline
Monitor publishes extensive airline data needed for your analysis. The Airline
Monitor is available through the Hunt Library Aerospace/Aviation electronic
databases. When you’ve accessed The Airline Monitor, select Online

Edition, then Block Hour Operating Costs (pdf) . This is a
large document. SH&E would have access to InselAir’s MD-80 operating data,
but for this assignment, assume costs are very similar to Allegiant Air. For
your analysis, use Allegiant’s reported data for the MD-80 and US industry data
for the A-320 (use the data for the A-320, not the A0320neo). The data you need
looks like this example:

• Fuel Prices: Your estimate of fuel prices over the next
fifteen years is critical. Historical data on jet fuel prices are available
from several sources. The Airline Monitor includes this data in the Block Hour
Operating Cost document (above). Data are also available from the industry
association Airlines for America. Select Economics & Analysis, then Traffic
& Financial Results. Scroll down to select the appropriate reports. You may
also find long-range forecast energy prices from the American Energy
Information Administration useful.

Note that fuel prices increased dramatically during the
global economic expansion of the mid-2000s peaking at nearly $4 per gallon in
June 2008, but plummeted during the subsequent recession. Fuel costs seem
likely to increase again when world demand recovers. You will need to estimate
future fuel costs for the analysis. Be certain that the fuel price for the
first year is the current jet fuel spot price (available from several sources
via a web search). Because fuel prices are difficult to predict, develop
estimates for a range of projected fuel prices. This is often done using
optimistic, pessimistic, and most likely scenarios.

• Return on Invested Capital: The appropriate return on
invested capital (the discount rate) varies by airlines; however, the following
extracts from the financial press are illustrative. Alaska Air Group CEO Bill
Ayer pointed to its target of 10% return on invested capital (ROIC). According
to President Ed Bastian, Delta Air Lines is also targeting a 10% sustainable
return on invested capital. Southwest Airlines is looking for a 15% ROIC. Your
fleet replacement decision will depend on what rate you choose. Airlines with
the best credit can borrow at the lower rates which also decreases the discount
rate. You should perform a sensitivity