Question

Suppose that business travellers and vacationers have the following demand for airline tickets from Chicago to Miami:

Price	Quantity Demanded (business travellers)	Quantity Demanded (vacationers)
\(150	2,100 tickets	1,000 tickets
200	2,000	800
250	1,900	600
300	1,800	400

1. As the price of tickets rises from \)200 to $250, what is the price elasticity of demand for (i) business travellers and (ii) vacationers? (Use the midpoint method in your calculations.)
2. Why might vacationers have a different elasticity from business travellers?

Short answer

The price elasticity of demand for business travellers will be 0.23, and for vacationers will be 1.29. The consumption can be deferred for the vacationers and not for the business travellers.

Step-by-step solution

Price elasticity of demand for business travelers

The business traveller’s price elasticity of demand is shown below:

$$\begin{gathered} E_d=\frac{\frac{Q_2-Q_1}{Q_2+Q_1}}{\frac{P_2-P_1}{P_2+P_1}} \\ =\frac{\frac{1900-2000}{1900+2000}}{\frac{250-200}{250+200}} \\ =\frac{-100}{3900}\times \frac{450}{50} \\ =-0.23 \\ \left|E_d\right|=0.23 \end{gathered}$$

The price elasticity of demand will be 0.23.

Price elasticity of demand for vacationers

$$\begin{gathered} E_d=\frac{\frac{Q_2-Q_1}{Q_2+Q_1}}{\frac{P_2-P_1}{P_2+P_1}} \\ =\frac{\frac{600-800}{600+800}}{\frac{250-200}{250+200}} \\ =\frac{-200}{1400}\times \frac{450}{50} \\ =-1.29 \\ \left|E_d\right|=1.29 \end{gathered}$$

The price elasticity of demand will be 1.29.

Elasticity of vacationers and business travellers

The more substitutes are available for any product, then the elasticity for that product will be high. Here, the vacationers have a different mode to travel, but for the business travellers, the only mode is flight as the only option since they have to reach early. Hence, the demand is elastic for vacationers and inelastic for business travellers.