Cruise prices are falling to unprecedented levels. Prices have fallen ten percent compared to a year ago. Carnival Cruise Lines reports that on the whole prices are below 1980 levels. They sold some cabins aboard the Sensation in August for $260 per person for a seven-day cruise. Even the luxury cruise lines are offering first-class upgrades and on-board shopping credit. The discounts are evident not only for the traditionall slow Fall season, but also for the peak Winter season.

The main reason for falling prices is the launching of several new cruise ships. Capacity has risen 39 percent over the past three years. This is drawing in many first-time cruise passengers. Putting a brave face on the situation, a Carnival spokesman, says that there has been no miscalculation by the cruise lines: research shows that once people take a cruise, they get hooked and keep returning.

The only concern that passengers have is whether the price cuts will result in lower quality. There is a fear that the standard of entertainment and food will be lower.

(Updated October 1, 2000)

1.
a) Draw a supply and demand diagram of the market for cruises. Mark the equilibrium price and quantity.
b) Cruise lines have increased the number of cruise ships by 39 percent over the last three years. Show the effect of this on the equilibrium price and quantity.
c) Why might this be of concern to the cruise lines?
d) If they react by cutting the quality of food and entertainment, what would be likely to happen? Why? Illustrate on your diagram.

2. In the long run, the cruise lines, hope that first-time cruise passengers return for more cruises.
a) Which determinant of demand might change?
b) Show the effect of this on the equilibrium price and quantity on your diagram above.

3. On balance, do you think that increasing the number of cruise ships was a miscalculation by the cruise companies? Explain your answer.