QUESTION ONE (20 marks)

Mahogany Air is a major local carrier in Zambia, 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

Lusaka-Ndola route the entry of Mahogany t into the market caused average fares to fall by 48

per cent and increased market revenue from K21,327,008 to K47,064,782 annually. On the

Lusaka-Livingstone route, however, the average fare cut in the market when Mahogany entered

was 70 per cent and market revenue fell from an annual K66,201,553 to K33,101,514.

Questions

i). Calculate the PEDs for the Lusaka-Ndola and Lusaka-Livingstone routes. (4marks)

ii). Explain why the above market elasticities might not apply specifically to Mahogany.

(4marks)

iii). If Mahogany does experience a highly elastic demand on the Lusaka-Ndola route, what is

the profit implication of this? (4marks)

iv). Explain why the fare reduction on the Lusaka-Livingstone route may still be a profitable

strategy for Mahogany. (4marks)