Question

Question:

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

PriceQuantity Demanded (business travelers)Quantity Demanded (vacationers)

$150

2,100tickets

1,000tickets

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?

Answer 1

We will use the midpoint method to compute the price elasticity of demand for given categories. 

(i) business travelers

Percentage change in price

$Percentage\: change\: in\: Price\, = \frac{P2\, -\, P1}{(P2\, +\, P1)\, \div\, 2}\times 100$

• P1 = 200
• P2 = 250

Hence,

$Percentage\: change\: in\: Price\, = \frac{250\, -\, 200}{(250\, +\, 200)\, \div\, 2}\times 100\,=22.22\%$

Percentage change in the quantity demanded

$Percentage\: change\: in\: Quantity\, = \frac{Q2\, -\, Q1}{(Q2\, +\, Q1)\, \div\, 2}\times 100$

• Q1 = 2000
• Q2 = 1900

$Percentage\: change\: in\: Quantity\, = \frac{1,900 \, -\, 2,000}{(1,900 \, +\, 2000)\, \div\, 2}\times 100\,=\,-5.13\%$

Price elasticity of demand is given as:

$Price\, elasticity\, of\, demand\,= \frac{Percentage\, change\, in\, quantity\, demanded}{Percentage\, change\, in\, price}$

$Price\, elasticity\, of\, demand\,= \frac{-5.13\%\,}{22.22\%}\,=-0.23$

ii) vacationers?

Percentage change in price

From the previous computations, we know that:

Percentage change in price = 22.22%

Percentage change in the quantity demanded

Q1 = 800

Q2 = 600

$Percentage\: change\: in\: Quantity\, = \frac{600 \, -\, 800}{(600 \, +\, 800)\, \div\, 2}\times 100\,=\,-28.57\%$

$Price\, elasticity\, of\, demand\,= \frac{-28.57\%\,}{22.22\%}\,=\,-1.29$