Delta Airlines has estimated that the cross-price elasticity of demand between t
ID: 1157964 • Letter: D
Question
Delta Airlines has estimated that the cross-price elasticity of demand between the number of tickets sold for their early morning flight Denver-Atlanta and the price of their early afternoon flight Atlanta-JFK is -1.6. Delta would like to increase the quantity of tickets in the Denver-Atlanta flight by 20%. Based on this information, Delta can accomplish this by
An increase in the price of the Atlanta-JFK flight by 20%.
An increase in the price of the Atlanta-JFK flight by 12.5%.
A decrease in the price of the Atlanta-JFK flight by 12.5%.
A decrease in the price of the Atlanta-JFK flight by 20%.
*Need Explination please*
An increase in the price of the Atlanta-JFK flight by 20%.
An increase in the price of the Atlanta-JFK flight by 12.5%.
A decrease in the price of the Atlanta-JFK flight by 12.5%.
A decrease in the price of the Atlanta-JFK flight by 20%.
*Need Explination please*
Explanation / Answer
Correct Answer:
C.
Working note:
Cross price elasticity = % change in quantity of early morning flight / % change in price of afternoon flight
-1.6 = 20%/% change in price of afternoon flight
% change in price of afternoon flight = 20%/(-1.6) = -12.5%
So, decrease in the price of afternoon flight (Atlanta-JFK) by 12.5%. will lead to increase in quantity of 20% of early morning flight (Denver – Atlanta).
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