' But as the economy wavers and technology enables businessmen and women to use virtual, rather than face-to-face meetings, focusing on either a low-end or high-end strategy is problematic. Southwest can generate fewer cost savings as fuel costs rise and the numbers of vacationers plummet. More airlines are adopting its 'nuts only' service, diluting the image of its unique brand. However, luxury service is less in demand, given the still-shaky nature of the economic recovery.
Q4: "Traditionally, the effects of tax policy on firms' demand for investment are summarized in estimates of the 'user cost of capital.' The user cost of a capital investment is the minimum return a firm needs to cover depreciation, taxes, and the opportunity costs of the funds used to finance the project. Lower user costs typically translate into higher investment levels," thus reducing taxes can stimulate investment by reducing the user cost of capital (Gale 2010). However, depreciation of investments for items such as facilities and machinery is inevitable, and will extract some toll upon the firm, no matter what the tax rate. "Almost every business must invest in some major equipment, vehicles, machinery, or furniture in order to operate" on a regular basis (Capital assets, 2003, Complete Tax).
In contrast to the user cost of capital, or depreciation estimated upon a per-project basis, "major assets that will be used in your business for more than a year are known as capital assets" or "assets that have a useful life of more than one year" (Capital assets, 2003, Complete Tax). Measuring depreciation in terms of capital assets requires taking stock of depreciation that takes place over time, rather than on a per-project basis. From an accounting standpoint capital assets are written off for more than one year, and the costs of depreciation are measured over the course of the years the entity uses the capital asset: depreciation may be measured regularly on a year-by-year basis, or may increase as the use of the asset depreciates more quickly from year to year.
Q5&6: If energy prices fall, the input costs of providing transportation will reduce for the firm, thus increasing the firm's profits if demand remains the same. In the short run, firms will respond to the fall in energy prices by increasing their services and possibly decreasing fare prices, to increase profits. In the long run, however, the market will begin to 'level out,' as there may be more market entrants, thus increasing the supply of the item and driving down the price to an unprofitable point. There is also a limit to how much a firm can produce, given its current assets. Eventually, the law of marginal utility will mean that it will become too costly to over-expand its offerings to the public and the level of demand will not justify such an expansion.
(Source: Nobilis 2010)
Fuel prices tend to be relatively inelastic: it is difficult, if not impossible, for the consumer to eliminate the use of transportation-related costs entirely. There is also a limit to how many transportation services the public can consume, even if they chose to fly more in the wake of decreased fares in the short-term. Other constraints will limit traveling, thus the truism that all constraints on behavior are costly. As there is a limit to how much the average vacation or business traveler can increase or decrease his or her travel, the short-run total cost curve lies above the long-run total cost curve, and the long-run costs resembles more 'level' behavior in the wake of the inelasticity of fuel demand.
Amadeo, Kimberly. (2009, December 20). Facts about NAFTA. About.com.
Retrieved April 21, 2010 at http://useconomy.about.com/od/tradepolicy/tp/NAFTA_Facts.htm
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Gale, William G. (2010). Deficits, interest rates, and the user cost of capital: A reconsideration of the effects of tax policy on investment. The Brookings Institution. Retrieved April 21, 2010 at http://www.brookings.edu/papers/2005/07taxes_gale.aspx
Messing with success. (2007). LA Times. Retrieved April 21, 2010 at http://articles.latimes.com/2007/nov/19/opinion/ed-southwest19
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Retrieved April 21, 2010 at http://ocw.mit.edu/NR/rdonlyres/Urban-Studies-and-Planning/11-380JUrban-Transportation-PlanningFall2002/4FC3B113-023B-4503-8F7F-351104D777EE/0/Week1a.pdf
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