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
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).

Answer 1

Using the midpoint method, the price elasticity of demand for business travelers is approximately -0.51, indicating inelastic demand, and for vacation travelers it is -1.29, indicating more elastic demand.

Step-by-step explanation:

The price elasticity of demand is a measure of how much the quantity demanded of a good responds to a change in the price of that good, calculated using the percentage change in quantity demanded divided by the percentage change in price. To find the elasticity for both business travelers and vacationers when the ticket price rises from $200 to $250, we use the midpoint method:

1. Calculate the percentage change in quantity demanded for each group.
2. Calculate the percentage change in price.
3. Divide the percentage change in quantity by the percentage change in price to get the elasticity.

For business travelers, the calculation is: ((1,900 - 2,000) / ((1,900 + 2,000) / 2)) ÷ (($250 - $200) / (($250 + $200) / 2)) = (-100 / 1,950) ÷ (50 / 225) ≈ -0.51.

For vacation travelers, the calculation is: ((600 - 800) / ((600 + 800) / 2)) ÷ ((250 - 200) / ((250 + 200) / 2)) = (-200 ÷ 700) ÷ (50 ÷ 225) ≈ -1.29.

The elasticity for business travelers is approximately -0.51, indicating inelastic demand, while the elasticity for vacation travelers is -1.29, indicating more elastic demand when the price rises from $200 to $250 using the midpoint method.