Question

Question# 3

Suppose that business travellers and vacationers have the following demand for FlyAlee airline tickets from Jeddah to Dammam.

Price (SAR)	Qd-Business Travel	Qd- Vacation Travel
150	2100	1100
200	2000	800
250	1900	500
300	1800	200

As the price of tickets rises from SAR250 to SAR300, what is the price elasticity of demand for

Business Travel (Show your workings)

Vacation Travel (Show your workings)

b. Why might vacationers have different elasticity than business travelers?

Suppose the % change in Qd-Business travel is -25% and % change in price is 60%.

Calculate the elasticity

What would be your recommendation for the FlyAlee airline either to increase the price of airline ticket or not? Explain why

Answer 1

a) Price elasticity for business travelers = % change in quantity/%change in price

% change in quantity = Q2-Q1/(Q2+Q1/2) = 1800-1900/(1800+1900/2)x100 = -100/1850 = -5.40

% change in price = P2-P1/(P2+P1/2) = 300-250/(300+250/2)X100 = 50/275 = 18.18

Price elasticity = 5.40/18.18 = 0.29

Price elasticity of vacationers :

% change in quantity = 200-500/(200+500/2) x100 = 85.71

% change in price = same as above = 18.18

Price elasticity = 85.71/18.18 = 4.71

b) Vacationers have different price elasticity than the business travelers as business travelers travel for important meetings and official purpose so they cant change their demand as it would harm their business whereas the vacation travelers are more likely to postpone their travel when the price rises as they would be able to save more money as their goal is leisure.

When the % in QD business travel is -25% and % change in price is 60%

So price elasticity = 25/60 = 0.41

which means the price elasticity of demand is inelastic.In this case the airline can increase the price of the ticket and get more revenue from the business travelers as they are less likely to decrease their demand.