Question

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

price (dollars	quantity demanded by business travelers	quantity demanded by vacationers
150	2,100	1,000
200	2,000	800
250	1900	600
300	1800	400

As the price rises from $250-$300, the price elasticity of demand for business travelers is _____ (3.33, .45, .30, 1) and the price for elasticity of demand for vacationers is_____ (0.45 3.33, 2.20, .30) using the midpoint method. Therefore the demand for airline tickets in this price range is _____(more or less) elastic for vacationers because business travelers are ____ (more or less) sensitive to price change.

Answer 1

A = Demand_{Business Traveller@$300} - Demand_{Business Traveller@$250}= 1800 - 1900 = -100

B = (Demand_{Business Traveller@$300} + Demand_{Business Traveller@$250}) / 2 = (1800 + 1900) / 2 = 1850

C = Price_{Business Traveller@$300} - Price_{Business Traveller@$250} = $300 - $250 = $50

D = Price_{Business Traveller@$300} + Price_{Business Traveller@$250}) / 2 = ($300 + $250) / 2 = $275

Price Elasticity of Demand_{Business Traveller} = (A / B) / (C / D) = (-100 / 1850) / (50 / 275)

                                                              = -0.3

E = Demand_{Vacationer@$300} - Demand_{Vacationer@$250} = 400- 600 = -200

F = (Demand_{Vacationer@$300} + Demand_{Vacationer@$250}) / 2 = (400 + 600) / 2 = 500

G = Price_{Vacationer@$300} - Price_{Vacationer@$250} = $300 - $250 = $50

H = Price_{Vacationer@$300} + Price_{Vacationer@$250}) / 2 = ($300 + $250) / 2 = $275

Price Elasticity of Demand_Vacationer = (E / F) / (G / H) = (-200 / 500) / (50 / 275)

                                                              = -2.2

As the price rises from $250-$300, the price elasticity of demand for business travelers is .30 and the price for elasticity of demand for vacationers is 2.20 using the midpoint method. Therefore the demand for airline tickets in this price range is more elastic for vacationers because business travelers are less sensitive to price change.

Absolute value of elasticity of demand for Business travelers is less than 1. This means less elastic (inelastic). Absolute value of elasticity of demand for Vacationers is greater than 1. This means that makest more elastic.

Travel is less necessary for Vactioners as compared to business travelers who have an urgent need to travel. vacationers may be able to rework their plans if prices are not within their range while business travelers are unable to reschedule their travels to to business exigencies.