Consider the following demand function for airline tickets (quantities are in th

Question

Consider the following demand function for airline tickets (quantities are in thousands):

Q = 10 - 0.1px + 0.4py + 0.25pz + 0.005Y, where:

px= price of an airline ticket

Q= quantity demanded

py= price of a bus ticket

pz= price of gasoline

Y= consumer income

* According to the above equation, airline tickets and bus tickets are substitute goods

If in equilibrium, the cross-price elasticity between airline tickets and gasoline is 1.1; when the price of the gasoline increases by 2%, the quantity demanded of airline tickets increases by ____ %?

Explanation / Answer

we know

Cross-Price Elasticity of Demand (CPEoD) = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)

so 0.01 = (% Change in Quantity Demand for Airline ticket)/0.02

so % Change in Quantity Demand for Airline ticket = 0.01*0.02 = 0.0002 or 0.02 % increase in demand for Airline ticket

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