Question

Consider the demand for leisure air travel versus business air travel.

a.        Which of those two would have a more elastic demand? Base your answers on the determinants of the price elasticity of demand. (Omit any discussion of factors that would not be relevant to leisure or business air travel).

b.        What would airlines do in terms of their ticket prices for leisure versus business travel if they wanted to increase their total revenue? Explain your reasoning.

c.        When a particular airline charged a price of $405 on a route, an average of 222 tickets per flight were sold. When it increased the price to $495, the number of tickets sold fell to 178. What is the price elasticity of demand for this airline in this case? Given an interpretation of the calculated elasticity.

d.        In what range would the income elasticity for leisure air travel fall? Explain briefly.

Answer 1

Page no. Date / P If Airlines want to total revenue increase it prue a is want to - revenue then increas the ticket teisure air travel Sinu And is - Business Total Revenue = 1 Business Air Trave inelastic a give Busines aslic Revenue = Price & Quantity Air Travel demand a given % rise will caux a smaller I. fail in Quantity bemanded . so that Total Revenue LPXQ risis. & q Price for Business Travel o P = $405 P2 = $495 Q , = 222 Q2 = 778 sa= Q2 - 6 = 178-222 = 62.44 AP = P2 - p = $ u 95 -405) = $_90 & Price Elasticity = % change in Q. To change in p of Ep =6) Ag. b Se of =(5447405 1 90 222 TEp 20,89 vl/A My NoteBook GAN

Date Page no. alir Intupretation of so-0.89 € Demand in inclasic since it is less than l. for every 1% in price, the demand for tickets declines by 0.89% the sina a leisure travel is a luxury good or a superion good, its demand will increase as an individual's income increars, Income fence Elasticity of leisure Air Travel will be greater than one since it is more sensitive to increase in income. YED I