Suppose that business travelers and vacationers have the following demand for ai

Question

Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:


Price Quantity Demanded Quantity Demanded
for business travelers for Vacationers
150 2,900 1,000
200 2,700 750
250 2,550 550
300 2,300 400

a) For business travelers, what is the price elasticity of demand between $150 and $200? Between $200 and $250? Between $250 and $300?
b) Answer part a for vacationers.
c) Will an airline be likely to raise price for both groups from $250 to $300? Explain.

Explanation / Answer

Formula is [(Q1-Q0)/1/2(Q1+Q0)]/[(P1-P0)/1/2(P1+P0)] So for business travelers we have (1,900-2,000)/1/2(1,900+2,000)/(250-200)/1/2(250+200) -.0512820/.2222222= -0.2308 For vacationers it is (600-800)/1/2(600+800)/ (250-200)/1/2(250+200) -.285714/.222222= -1.2857

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