Suppose that business travelers and vacationers have the following demand for airline tickets from New York to Boston:

PriceÂ Â Â Â Â Â Â Â Quantity DemandedÂ Â Â Â Â Â Â Â Â Â Â Quantity Demanded Â Â Â Â Â Â
Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â (business travelers)Â Â Â Â Â Â Â Â Â Â Â Â (vacation travelers)
$150Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2,100 ticketsÂ Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1,000
$200Â Â Â Â Â Â Â Â Â Â Â Â Â Â 2,000Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 800
$250Â Â Â Â Â Â Â Â Â Â Â Â 1,900Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 600
$300Â Â Â Â Â Â Â Â Â Â Â Â Â Â 1,800Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â 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?

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