Consider the following demand function for airline tickets (quantities are in th
ID: 1097916 • Letter: C
Question
Consider the following demand function for airline tickets (quantities are in thousands):
Q = 10 - 0.1px + 0.4py + 0.25pz + 0.005Y, where:
px= price of an airline ticket
Q= quantity demanded
py= price of a bus ticket
pz= price of gasoline
Y= consumer income
* According to the above equation, airline tickets and bus tickets are substitute goods
If in equilibrium, the cross-price elasticity between airline tickets and gasoline is 1.1; when the price of the gasoline increases by 2%, the quantity demanded of airline tickets increases by ____ %?
Explanation / Answer
we know
Cross-Price Elasticity of Demand (CPEoD) = (% Change in Quantity Demand for Good X)/(% Change in Price for Good Y)
so 0.01 = (% Change in Quantity Demand for Airline ticket)/0.02
so % Change in Quantity Demand for Airline ticket = 0.01*0.02 = 0.0002 or 0.02 % increase in demand for Airline ticket