cenario 1: Globe Travel Agency sells Spring Break trips to University of Houston
ID: 433125 • Letter: C
Question
cenario 1: Globe Travel Agency sells Spring Break trips to University of Houston undergraduate
students. The fixed cost of Globe is $100,000 and its variable cost is $400 for every student who takes
the trip Globe offers. The price elasticity of demand is -2.5 at all levels of price. At present, the price of
the trip is $600/student and, at this price, demand is 1200 units. Assume that the number of trips sold
always equals demand.
Please refer to Scenario 1. If the price is decreased to $588/unit, the new demand will be approximately
given by:
1140 units
1170 units.
1230 units.
1260 units
1140 units
1170 units.
1230 units.
1260 units
Explanation / Answer
Price elasticity = (Change in quantity/Change in price) *P/Q
-2.5 = (Change in quantity/(588-600))*600/1200
X = 60
Change in quantity = Q2-Q1 = 60
Q2 = 1260 units
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