Q.25 Transatlantic air travel in busi... [FREE SOLUTION]

Chapter 5: Q.25 (page 130)

Transatlantic air travel in business class has an estimated elasticity of demand of 0.62, while transatlantic air travel in economy class has an estimated price elasticity of 0.12. Why do you think this is the case?

Short Answer

Expert verified

The estimated price elasticity of demand in business class is less than that of economy class because the business class tickets have an inelastic demand and economy class tickets have an elastic demand.

Step by step solution

Step 1. Elastic and inelastic demand:

Elastic demand refers to how responsive the quantity sought or supplied is to price variations. Whereas, consumers are less receptive to price adjustments when demand is inelastic.

Step 2. Explanation:

Since the price elasticity of demand in first class is less elastic than the price elasticity of demand in economy class, the projected elasticity of demand in first class airline travel is 0.62 and in economy class airline travel it is 0.12. This is because, no matter how much the price of a first-class airplane ticket rises, demand will remain unchanged since those who can afford it are unconcerned about the price hike. On the other hand, as the price of the economy class rises, persons with average earnings will be impacted, and demand for it would fall.