Answer to Question #300979 in Macroeconomics for laiba

Question

Using diagrams and the concept of elasticity of demand to support your answer, explain how both UK rail companies and airways go about filling seats in order to maximise revenue

Answer 1

Using diagrams and the concept of elasticity of demand to support your answer, explain how both UK rail companies and airways go about filling seats in order to maximize revenue

Both UK rail companies and airways are monopolies. A monopolistic market is one in which only one company produces a single product. A profit maximizer is a major attribute of a monopolist.

The monopolist controls the price and quantity requested in a monopolistic market since there is no competition. When the marginal cost matches the marginal revenue, the profit margin of a monopoly is maximized.

A monopolist sees its demand curve to be identical to the market demand curve, which is downward-sloping for most commodities. As a result, if the monopolist picks a high level of output (Qh), it can only charge a low price (Pl); on the other hand, if the monopolist chooses a low level of production (Ql), it may charge a higher price (Ph). The monopolist's task is to find the perfect balance of price and quantity to maximize profits.

A monopolist's profit-maximizing output y* is either 0 or positive and meets the following criteria:

• MR(y*) = MC(y*)
• MR'(y*)  MC'(y*)
• (y*)  0.

Where

MR is  marginal revenue

MC is margins cost

Graphical representation.

The requirements met by a positive profit-maximizing output are depicted in the following figure, given a possible form for the marginal revenue function:

The demand curve of both UK rail companies and airways is likely to be particularly inelastic in comparison to other types of markets, as near replacements may not be accessible if the price is raised.

The UK rail companies and airways can set either the ticket price or the quantity, but not both; for example, if they set a price of OP1, the market dictates that only a quantity of OQ1 can be sold; on the other hand, if the monopolist sets a quantity of OQ2 to be sold, the demand curve clearly dictates that this can only be done at a price of OP2.

To keep prices in the top price ranges, they will limit output. They will adopt the profit-maximizing equilibrium as MC=MR.