Concept Question 2.5 Consider the following demand function for airline tickets

Question

Concept Question 2.5 Consider the following demand function for airline tickets (quantities are in thousands) Q = 10-0.1 px-04py +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 complementary goods If in equilibrium, the cross-price elasticity between airline tickets and gasoline is 2.3; when the price of the gasoline increases by 2%, the quantity demanded of airline tickets increases by 4.60% (enteryour response rounded to two decimal places

Explanation / Answer

Answer to blank 1: Complementary

Answer to blank 2: 4.60%

Explanation:

In the demand equation, the price coefficient of bus tickets (Py) is negative,i.e., -0.4. The negative coefficient means, airline tickets and bus tickets are complementary goods.

Since price coefficient of gasoline is positive, the airline tickets and gasoline are substitute goods. It means if the gasoline price will increase, demand for airline tickets will increase.

Cross-price elasticity of demand = % increase in quantity demanded of airline tickets / % increase in price of gasoline

2.3 = % increase in demand for airline tickets / 2%

% increase in the demand for airline tickets = 2% * 2.3 = 4.60%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.