Question

3. Business travelers and vacationers have different price elasticities of demand for airline tickets from Jacksonville to Atlanta.

When the price of airline tickets increases by 20%, the number of tickets bought by business travelers declines by 5%, and the number of tickets bought by vacationers declines by 30%.

I) Calculate price elasticities of demand for business travelers and vacationers, respectively.

II) Who is less sensitive to price change: business travelers or vacationers?

Answer 1

3. Business travelers and vacationers have different price elasticities of demand for airline tickets from Jacksonville to Atlanta.

It is given that, when the price of airline tickets increases by 20%,

✓ Number of tickets bought by business travelers declines by 5%. In other words, the Demand for tickets of Business Travelers declines by 5%.

✓ Number of tickets bought by vacationers declines by 30%. In other words, the Demand for tickets of Vacationers declines by 30%.

With the help of these given information we will answer the following questions.

(I) From the defination of price elasticity of demand we get to see that,

Price Elasticity of Demand is the ratio of percentage change in quantity demanded to percentage change in price.

Hence,

E = (% ∆ in Quantity Demanded)/(% ∆ in Price)

Here, ∆ refers to 'change'.

• For Business Travelers,

% ∆ in Quantity demanded = 5%

% ∆ in Price = -20% (As price decreased)

Hence, Price Elasticity of Demand for Business Travelers

EB = 5/(-20) = -0.25

Hence, price elasticity of demand for business travelers is (-0.25).

• Now, for Vacationers,

% ∆ in Quantity demanded = 30%

% ∆ in Price = -20% (As price decreased)

Hence, Price Elasticity of Demand for Vacationers

EV = 30/(-20) = -1.5

Hence, price elasticity of demand for vacationers is (-1.5).

(II) According to the defination of elasticity we know that, the price elasticity of demand measures the change in quantity demanded due to change in price level.

Here, due to 5% increase in price, the vacationer's demand decreases by 30% and the business traveler's demand decreases by 5% only.

Hence, the vacationers are much more affected by the price change. They are more sensitive. business travelers are less sensitive to price change.

Also, from the price elasticity of demand for vacationers and business travelers we can see that, EV > EB. Which means, the vacationers demand is more elastic than business travelers. Hence, vacationers are more sensitive and business travelers are less sensitive.

Hence, business travelers are less sensitive to price change.

Hope the explanations are clear to you my friend.