EXERCISE 3 Discuss the use of elasticity to set airline fares for individuals and for business travelers.
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Elasticity is a measure of how sensitive the demand for a product or service is to changes in price. In the context of airline fares, elasticity refers to how much the demand for air travel changes in response to changes in ticket prices. When it comes to setting Show more…
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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 2100 1000 200 2000 800 250 1900 600 300 1800 400 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.) Why might vacationers have a different elasticity than business travelers?
Azat N.
As the price of tickets rises from $250 to $300, the price elasticity of demand for business travelers is , and the price elasticity of demand for vacationers is , using the midpoint method. Therefore, the demand for airline tickets in this price range is elastic for vacationers because business travelers are sensitive to changes in price.
Taimoor S.
Gillen and Hasheminia (2013) estimate that the elasticity of demand for air travel is -0.17 for people traveling alone and -3.09 for couples. Are these demand elasticities elastic or inelastic? For which type of traveler is demand less elastic? Why do you think these elasticities differ in this way?
Applying the Supply-and-Demand Model
Sensitivity of the Quantity Demanded to Price
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