Question

8.
Space Spider Airline is the only airline in Spiderland. The airline has two major groups of passengers – business travelers and vacation travelers. One group of them has its price elasticity of demand at -1.8 and another group has -3.0 respectively.
a. Which group, business travelers or vacation travelers, is more likely having its price elasticity of demand at -3.0? Briefly explain your answer.

b. Which traveler group will be charged a higher fare by Space Spider Airline under price discrimination? Suggest THREE practical ways for Space Spider Airline to identify this group of passengers. Explain your answers briefly.

Answer 1

Q.8 (a) The price elasticity of demand should be much lower for business travelers. Vacation travelers likely to have a higher elasticity of demand of -3. Business travelers are traveling for work and will do so irrespective of the price as they have work to attend to, unlike vacation people, who can just postpone the pans if prices are high or travel earlier if prices are low.

(b) Under price discrimination, the airlines will charge a higher price for the business travelers as an increase in price will lead to a lesser decrease in the quantity demanded of airline seats as compared to the vacation travelers. The airlines can identify the two groups easily by the following:

(i) On the web ticket booking site, the airlines can simply ask the passengers the purpose of travel before booking and showing prices.

(ii) The airlines can ask the passengers before booking that if after booking the flight, the passengers want to be taken to a webpage showing holiday resorts around the destination area. If the travelers say yes, they are likely to be vacation travelers.

(iii) The airlines can gain some understanding about the two groups by analyzing the number of people traveling and their age group. If there is a group including both children and old age people, they are most likely to be vacation travelers. Smaller groups of working-age men and women are likely to be business groups