Answer to Question #245733 in Microeconomics for shine

Question

Suppose that business travelers and vacationers

have the following demand for airline tickets

from New York to Boston:

Quantity Demanded Quantity Demanded

Price (business travelers) (vacationers)

$150 2,100 tickets 1,000 tickets

200 2,000 800

250 1,900 600

300 1,800 400

a. As the price of tickets rises from $200 to

$250, what is the price elasticity of demand

for (i) business travelers and (ii) vacationers?

(Use the midpoint method in your

calculations.)

b. Why might vacationers have a different

elasticity from business travelers?

Answer 1

Elasticity of demand depicts how much a consumer responds to change in price level.

(a)

$Ed=\frac{\frac{Q_2-Q_1}{\frac{Q_2+Q_1}{2}}}{\frac{P_2-P_1}{\frac{P_2+P_1}{2}}}$

(i)

For business travelers

$Ped,Ed=\frac{ \frac{1900-2000}{\frac{1900+2000}{2}}}{\frac{250-200}{\frac{250+200}{2}}}$

$Ed=-0.23$

$|Ed|=-0.23<1; inelastic$

(ii)

$Ped,Ed=\frac{ \frac{600-800}{\frac{600+800}{2}}}{\frac{250-200}{\frac{250+200}{2}}}$

$Ed=-1.29$

$|Ed|=-1.29<1;inelastic$

(b)

Vacationers are casual with their plan whereas business travelers are traveling with business purpose thus their elasticity of demand for tickets is less affected with change in price.