QUESTION THREE(20 Marks)

The table below represents the demand and supply schedules for Cheap1 Airlines, a low cost domestic airline. Table 3.1: Daily demand and supply schedule of Cheap1 Airlines for the Durban to Johannesburg route.

Price of air tickets (Rands)

Quantity demanded (tickets/day)

Quantity supplied (tickets/day)

500

300

50

600

250

100

700

200

150

800

150

200

900

100

250

1000

50

300

1100

0

300

1. Plot the supply and demand curves on the same set of axes. Explain what is unusual about the supply curve and why might this be true. (12 marks)

1. What is the equilibrium price and quantity of the air tickets? (4 marks)

1. Suppose there is a decrease in the number of tourists going from Johannesburg to Durban. The relevant curve changes by 25 units at each prevailing price.
2. Plot the effect of this decrease on your existing diagram in 3.1, clearly showing the new equilibrium price and quantity of air tickets. (4 marks)