Question

Airlines now commonly charge passengers a fee to check a bag(to be placed in the hold).Using an appropriate model or models, illustrate how this increase in the cost of air travel is likely to affect the demand for tourism versus the demand for business meeting travel

Answer 1

As airlines charging to check the bags, this will increase the opportunity cost of travel for both tourism and business meeting travel will be increased.

However, the impact on the optimal level for the two will differ. This is because the demand function is different for the two. As the demand for tourism comparatively more elastic than the demand for the business meeting. And it is known that one per cent change in price greater change in quantity for more elastic demand. Thus, it can conclude that the increase in cost to both kind of customer is the same but the end outcome will be different because of their different elasticity. The demand for tourism is elastic as tourism can be postponed but travelling for a business meeting cannot be postponed even at the higher price for travelling. Therefore, the change in the quantity of travel for tourism will be greater than the change in the quantity of travel for the business meeting which is shown in the diagram below-