Below: Suppose that business travelers and vacationers have the following demand

Question

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

Price        Quantity Demanded            Quantity Demanded       
                 (business travelers)             (vacation travelers)
$150               2,100 tickets                       1,000
$200               2,000                                    800
$250             1,900                                    600
$300               1,800                                    400

a) as the price of tickets rises from $200-$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 the vacation travelers have a different elasticity from business travelers?

Explanation / Answer

price elasticity of demand for business travelers = {(1900-2000)/[(1900+2000)/2]} / {(250-200)/[(200+250)/2]} = -0.23

price elasticity of demand for vacationers = {(800-600)/[(800+600)/2]} / {(250-200)/[(200+250)/2]} = -1.29

They have different elasticitties due to their different propensity, the business travelleres need to travel and the price is often taken care by the company and the trip is usually for professional purposes which cannot be altered/postponed. However, the vacationers are leisure travellers who can alter/postpone their trip due to increase in price of ticket as that won't any addional loss of business due to the trip.

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