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3. The government of Byngia has introduced a new tax on airline travel. Byngia has two...

3. The government of Byngia has introduced a new tax on airline travel.

Byngia has two types of travelers, business travelers and leisure travelers. Business

travelers in Byngia have an elasticity of demand of –1.2, while Byngian leisure travelers

have an elasticity of –3.0. Airlines can price discriminate among these groups; that is,

they can charge different prices to the different types of fliers in the market. Which type

of travel will bear the larger burden of the tax? Explain.

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Answer #1

Ans) Business travelers in Byngia will bear the larger burden of the tax.

Since the the elasticity of demand for business travelers is lower so their demand is less elastic meaning a small percentage increase in price will not lead to a larger percentage decrease in quantity. The  demand for Byngian leisure travelers is more elastic so business travelers will bear the larger tax burden. Less elastic the demand, larger the tax burden.

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