Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston: Price Quantity Demanded by Business Travelers Quantity Demanded by Vacationers (Dollars)
150 2,100 (Tickets) 1,000 (Tickets)
200 2,000 800
250 1,900 600
300 1,800 400

Required:
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 in your calculations.)
b. Why might vacationers have a different elasticity from business travelers?

Answer and Explanation:

a. The computation of the price elasticity of demand is

i. For business travelers

= {(1900  - 2000) ÷ [(1900 + 2000) ÷2]}  ÷  {(250 - 200) ÷ [(200 + 250) ÷ 2]}

= 0.23

ii. For Vacationers

=  {(800 - 600) ÷ [(800 + 600) ÷ 2]} ÷ {(250 - 200) ÷ [(200 + 250)  ÷ 2]}

= 1.29

b. Since the price would increase from $200 to $250 so the price elastiicy of business travelers & vactationers is 0.23 and 1.29 respectively. So the demand for for airline tickets would be more elastic for vacationers as the business travelers would be less senstitive for price change