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Your rich aunt is going to give you an end-of-year gift of $1,000 for each of the next 10 years.
a. If general price inflation is expected to average 6% per year during the next 10 years, what is the equivalent value of these gifts at the present time? The real interest rate is 4% per year.
b. Suppose that your aunt specified that the annual gifts of $1,000 are to be increased by 6% each year to keep pace with inflation. With a real interest rate of 4% per year, what is the current PW of the gifts?
Duck Airlines charges all passengers the same $400 fare on one of its routes. The average flight carries 60 people in a plane with a capacity of 100. One third of the flyers are business travelers and two thirds are leisure travelers. A bright, young economist tells the airline that it should engage in price discrimination. She estimates that if it increases the business fares by 10%, it will lose 5% of the business flyers; and, if it reduces leisure fares by 10% it will increase leisure traffic by 20%. Calculate the total revenue of Duck under their current one-price plan and under the price discrimination plan.
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