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

Required:
a. As the price of tickets rises from $200-$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 the vacation travelers have a different elasticity from business travelers?

                                   Quantity Demanded    Quantity Demanded

                                    (business travelers)      (vacation travelers)

a. Price Elasticity of Demand   0.23 )                           1.3

=                                                 Inelastic                      Elastic

b. The vacation travelers might have a different elasticity from business travelers because vacation travels are leisure activities.  The travelers can change their mind not to embark on the travel when they can no longer afford the cost.  This is unlike business travelers, who travel for business purposes and not for leisure.  Their costs are always recaptured in their revenues.

Explanation:

a) Data and Calculations:

             Price          Quantity Demanded  Quantity Demanded

                                (business travelers)    (vacation travelers)

             $150                 2,100 tickets                   1,000 tickets

             $200              2,000                                 800

             $250               1,900                                600

             $300                1,800                                400

Change in demand =  100 (2,000 - 1,900)           200 (800 - 600)

=                                   100/1,950 * 100                200/700 * 100

=                                   5.13%                                      28.6%

Change in price = $50 ($200 - $250) = 22%

Price Elasticity of Demand = Change in Quantity Demanded/Change in Price

=                                 0.23 (5.13%/22%)                  1.3 (28.6%/22%)

=                                 Inelastic                                 Elastic

answer; situational irony;