in the second half of 2002, several malor U.S airlines began runnning test to de
ID: 1191014 • Letter: I
Question
in the second half of 2002, several malor U.S airlines began runnning test to determine if theycould cut walk-up on restricted business fares and maintain or increase revenues. Continental Airlines offered an unrestricted fare between Cleveland and Los Angeles od $716,compared with its usual $2000 fare and found that is earned about the same revenue as it would have collected with the higher fare.Making similar changes on its routs from Cleveland to Houston,Continental found that the new fare structure yielded less revenue ,but higher market share.On Houston-Oakland route ,the new fare structure resulted in higher revenue.What did these test results imply about business travel price elasticity of demand on the : Cleveland-Los Angeles,Cleveland-Houston and Houston-Oakland routs for Continental Airlines? explain and what factors caused these differences?
Explanation / Answer
Cleveland to LA : R1 = 2000*q1 and R2 = 176*q2 now we know that R!=R2 so q2 = 11.36q1. Price elasticity = (q2-q1)/q1 / (176-2000)/2000 = 10.36q1/q1 / -0.91 = -10.36/.91 = -11.38 We see here that price elasticity of demand is very high. This means that people travelling between Cleavland and LA are highly price sensitive. Rhis has to be true as LA is vacation spot and cheap airfare is a big factor while deciding the vacation spot.
Cleaveland to Houston: The number of flyers those increased because of decrease in price is less than those of LA. so we can say that price elasticity of Houston is less in comparision to price elasticity of LA. May be people travel to Houston for work and so it dosent makes much of a difference if there is decrease in price
Cleaveland to Oakland: The number of flyers those increased because of decrease in price is more than those of LA. so we can say that price elasticity of Oakland is more in comparision to price elasticity of LA. May be people travel to Houston for pleasere and so it does makes a difference if there is decrease in price
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