Question

What effect, if any, does each of the following events have on the price elasticity of demand for corporate-owned jets?

a) A decline in corporate earnings causes firms to cut their travel budgets, which in turn causes expenditures on corporate jet travel to become a larger fraction of total spending on corporate travel.

b) A new, much more fuel-efficient corporate jet is introduced.

c) Further deregulation of the commercial airlines industry substantially increases the variety of departure times and destinations offered by commercial airlines.

d) The cost of manufacturing corporate jets rises.

Answer 1

Answer to part (a)

Since the travel budget is decreasing. It will change the price of the airfare, which will, in turn, affect the quantity demanded of the services.

Answer to part (b)

Introduction of new and much more fuel-efficient corporate jet will reduce the price of airfare to which demand will be higher. Thus, the price elasticity of demand will be higher in this event.

Answer to part (c)

Further deregulation of the commercial airline industry substantially increases the variety of departure times and destinations offered by commercial airlines will increase the price elasticity of demand.

Answer to part (d)

There would be no direct effect of this event on the price elasticity of demand. Still, an increase in the cost of manufacturing corporate jets will force companies to change their pricing policies to recover the cost as soon as possible and will eventually increase the airfare to which customer will decrease their demand. Thus, price elasticity will be higher.