Question

An article in the Wall Street Journal noted the following: Instead of relying on a full - coach, round trip unrestricted fare of about $2,000 between Cleveland and Los Angeles ... Continental [Airlines] since June has offered a $716 unrestricted fare in that market.... Through October, the test resulted in about the same revenue that Continental thinks it would have collected with its higher fare.

Source: Scott McCartney, "Airlines Try Cutting Business Fares, Find They Don't Lose Revenue", Wall Street Journal, November 22, 2002.
What is the absolute value of the price elasticity of demand on this airline route?
A. 0
B. approximately 1
C. less than 1
D. greater than 1

Answer 1

The correct answer is C. The absolute value of the price elasticity of demand on this airline route is less than 1.

Step-by-step explanation:

The absolute value of the price elasticity of demand on this airline route can be determined using the formula:

Elasticity = % Change in Quantity Demanded / % Change in Price

From the given information, we know that the test resulted in about the same revenue with the lower fare. This means that the demand for the airline route is likely to be inelastic, with a price elasticity of demand less than 1. Therefore, the correct option is C. less than 1.