Question

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

Price Quantity Demanded (Business travelers) Quantity Demanded (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 than business travelers?

Answer 1

1) Price elasticity of demand for business travellers.

Formula.

Percent change in quantity demanded/percent change in price.

Percent change in quantity demanded $= \frac{q_2-q_1}{q_1}$

$=\frac{2000-1900}{2000} \\ =\frac{100}{2000} \\ =0.05$

Percent change in price $= \frac{p_2-p_1}{p_1}$

$=\frac{200-250}{200} \\ =\frac{-50}{200} \\ =-0.25$

Therefore.

$\frac{0.05}{-0.25}=-0.2$

Therefore price elasticity of demand for business travellers=-0.2

2) For vacationers.

Percent change in quantity demanded

$= \frac{800-600}{800} \\ =\frac{200}{800} \\ =0.25 \\ \frac{0.25}{-0.25} =-1$

Therefore price elasticity of demand for vacationers=-1

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.