We are given the following demand schedules for business travelers and vacation
ID: 1224143 • Letter: W
Question
We are given the following demand schedules for business travelers and vacation travelers on a maior airline 2. Quantity Demanded usiness Travelers 2,000 1,900 Quantity Demanded acationers 800 600 Price $200 $250 As the price rises from $200 to $250, what is the price elasticity of demand for business travelers and i) vacationers? Is demand elastic or inelastic for each group? a. b. What is the total revenue earned on business tickets when the price is $250? c. What may be some reasons why the price elasticity of demand between each group of travelers is different?Explanation / Answer
1. As the price rises from $200 to $250 price elasticity of demand
i) Business travellers:
EOD=%Change in quantity demanded / % Change in Price
Substituting values in the formula,
[(2,000 – 1,900)/1,950]/[(250 – 200)/225] = 0.05/0.22 = 0.23
Thus, Business travellers have an inelastic demand because EOD<1
ii). For vacationers
EOD=%Change in quantity demanded / % Change in Price
Substituting values: [(800 – 600)/700] / [(250 – 200)/225] = 0.29/0.22 = 1.32
Thus, Business travellers have an elastic demand because EOD>1
2. What is the total revenue earned on business tickets when the price is $250
Total Revenue= 250*1500= $37,500
3. What may be some reasons why the price elasticity of demand between each group of traveller is different?
Business travellers have less adaptable schedule. Time element is more important than the price element, thus their demand is inelastic
On the other hand, the price elasticity of demand for vacationers is higher because they are flexible and can easily use a different mode of transportation.
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