Answer the following and show all work: Suppose that business travelers and vaca
ID: 1154637 • Letter: A
Question
Answer the following and show all work:
Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:
a. As the price of tickets rises from $200 to $250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers?(Use the midpoint method)
b. Why might vacationers have a different elasticity than business travelers?
Price Quantity Demanded (business travelers) Quantity Demanded (Vacationers) $150 2100 1000 200 2000 800 250 1900 600 300 1800 400Explanation / Answer
Original price: 200 New price: 250 Change in price; 50 Avergae price; 225 % Change in price: 50 /225 *100 = 22.22% Demand for Business travellers: Original demand: 2000 New demand: 1900 Change in demand: -100 Average demand: 1950 % change in demand: -100 /1950 *100 = -5.13% Demand for Vacationers: Original demand: 800 New demand: 600 Change in demand: -200 Average demand: 700 % change in demand: -200 /700 *100 = 28.57% Price Elasticity of demand: % change in demand/ % change in price Business Travellers: -5.13% / 22.22% = -0.23 Vacationers: -28.57% / 22.22% = -1.29 Vacationers demand is more price elastic due to the fact that their needs can be postponed.