How airlines increase their revenues

Airlines try to squeeze as much revenue as they can out of each passenger they sell to. Airlines set
ticket prices to increase revenues by varying prices at different times of the year and times of the
day. When EasyJet sets its ticket prices it also takes into account the importance of anchoring bias.

EasyJet’s website uses elements of behavioural economics in the choice architecture of the site's
page design and layout to encourage you to make a purchase and buy complementary goods. For
example, the site takes you to default choices such as adding a cabin bag where you have to
actively opt out of the selection given to you by the web page.

Air travel raises important policy issues for governments because of its social costs. The industry is
responsible for significant carbon emissions that contribute to climate change. Air travel also leads
to noise and air pollution that adversely affects communities that live near airports.

Questions

a.. (i) efine the term anchoring bias. [2]

ii Eplain how anchoring bias might affect the price a buyer is willing to pay for a flight when they
(ii)
are looking at flight prices on the easyJet website. [4]

b. The off-peak price for an easyJet ticket is $80 and the quantity of tickets sold is 4,500 tickets. The
price elasticity of demand for off-peak tickets is -2.5. The peak price for an easyJet ticket is $250 and
the quantity of tickets sold is 14,000 tickets. The price elasticity of demand for peak tickets is -0.6.

Based on this data, calculate the following:

(i) The % change in quantity demanded of off-peak tickets if the price decreases from $80 to $64.
[2]

(ii) The change in total revenue of off-peak tickets. [2]

(iii) The change in quantity demanded of peak tickets if the price increases from $250 to $325. [2]

(iv) The change in total revenue of peak tickets. [2]

d. (i) Define the term choice architecture. [2]

(ii)
ii plain two ways easyJet uses choice architecture on its website to increase its total revenue. [4]

e.. Us g the information in the text and your economic knowledge, recommend a policy the
government could use to reduce the negative externalities associated with air travel. [10]

Total [30]