Economics 401
Spring 2010
Hartmann
Worksheet 3
Due: TBA
1. Food consumption peaks at dinnertime and is very small between midnight and 6:00 a.m. In view of
this systematic variation in consumption over the day, why is peak-loading pricing not used more
extensively for food? (Hint: think about how restaurants deal with food production capacity problems
and why Xcel Energy cannot do the same.)
2. A private golf club has two types of members. Serious golfers each have the demand curve Q=350 10P, where Q represents the number of rounds played per year and P is the dollar per-round price.
Causal golfers have the demand curve Q=100 -10P. The club faces a constant marginal cost of $5 per
round played by either type of member.
a. If the club can engage in third-degree price discrimination, what prices should it charge to the two
types of members?
b. Suppose that the club can employ a two-part pricing scheme but must charge all members the
same annual membership (entry) fee. What entry fee and per-round price should the club charge?
c. Suppose that the club can employ a two-part pricing scheme and can charge different members
different entry fees. What entry fee and per-round price should the club charge?
d. Will membership ever consist of 400 serious and 120 causal golfing rounds played per year?
 See other side.
3. Suppose as the CEO of Delta Airlines you are called by the Minnesota Legislator to respond to
complaints of anticompetitive practices associated with hubbing (i.e., density of passengers). You ask
your senior economist to investigate the economic issues concerning hubbing. The economic report
is attached to the assignment. It contains a brief introduction of the relevant economic issues, a
description of the variables used in the econometric analysis, and tables of the regression results.
Based on the information contained in the tables, respond to the complaints of anti-competitiveness of
hubbing (i.e., does having a large market presence at the Minneapolis-St. Paul airport lead to anticompetitive behavior). If the economic analysis, for example, suggests that Delta is guilty of price
gouging, then acknowledge it. Always provide support for your assertions by referring back to the
study’s findings.
Please focus your analysis on the following issues.
a. What are the economic implications of the estimated demand parameters? (Your analysis must
address the first three variables listed in Table 4 and average ξ for each of the first three estimated
models.)
b. Based on Table 4, evaluate the hubbing airline’s ability to raise prices at its hub airports (e.g., can
Delta raise prices for all traveler types). Explain when and why they are able to charge a higher
price than their competitors.
c. Based on Table 4, does the existence of a hub airline at MSP provide a “monopoly umbrella” to
the other non-hub airlines serving the airport? Explain.
Additional Information:
The demand estimates are based on a discrete choice model of consumer purchasing behavior.
The model is very similar to the model of automobile purchases we discussed in class. For example,
airline demand is constructed from utility maximization decisions and firm production decisions depend
on profit maximization motives.
Column I in Table 4 is based on estimates assuming there is one type of consumer. Column II in
Table 4 is based on estimates assuming there are two types of consumers who fly. Type 1 represents
tourist travelers (e.g., more price sensitive travelers) and type 2 reflects business traveler’ (e.g., less price
sensitive, high disutility from connecting flights). Ignore column IV of Table 4 in your analysis.