Answer Happy

1. Borenstein and Rose, two famous economists have studied a lot
of questions relating to airline
pricing. One of their main hypotheses is that airlines in financial
distress lower prices significantly.
Several factors impact the pricing behavior of the airlines. The
ones that they considered are length
of the flight (in miles), quality of service (good and bad), load
factor (% of seats filled on the
flight on an average), number of competitors in the route the
flight operates, and service tax in
the departing airport. Assume that they also have data on airline
companies’ financials. You can
assume that a company is in severe financial distress if it failed
to reach its financial targets in
the previous quarter. Suppose Borenstein and Rose hired you as a
research assistant, how would
you help them test the hypothesis? Specifically, answer the
following:
(a) What is the dependent variable here?
(b) What are the independent variables here? Explain their
nature.
(c) How would you set up a model to test the hypothesis that a
company in financial distress
lowers prices significantly? What is the relevant test here?
(d) Suppose, they also want to test that airlines under financial
duress react strongly for longer
flights than for shorter flights. How would you change your model
in Part (c) to accommodate this test?