Question 2 (b)(i)
Mid-point price elasticity of demand for air tickets: business travellers and vacationers
8 marks
- Time to write
- About 16 minutes
Question
Question 2 (b)(i) · 8 marksAssume that business travellers and vacationers face the following demand for airline tickets from Delhi to Jaipur:
| Price | Business Quantity demand - Number of Tickets | Vacationers Quantity demand - No. of Tickets |
|---|---|---|
| 180 | 3150 tickets | 1500 tickets |
| 240 | 3000 | 1200 |
| 300 | 2850 | 900 |
| 360 | 2700 | 600 |
- When the price of tickets goes up from $240 to $300, what will be the price elasticity of demand for (i) business travellers, and for (ii) vacationers? (Use the midpoint method in your calculations.) (6,2)
Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.
Before you write
Read off the question and its marks
Read from the question
- Assume that business travellers and vacationers…The paper fixes this: use it as given, and say so in your answer.
- calculationsFormula first, then the working, then the answer with its unit (₹, %, units).
What the paper leaves open
As printed, the marks (6,2) are written once, at the end of item (i), which asks for two elasticities: 6 and 2 marks. The inner (i) and (ii) belong to the sentence. The table is repeated in item (ii)'s slot.
Write it in this order
- Read the data; note exactly what is asked 1 min
- 1 Mid-point formula 1 mark 2 min
- 2 Percentage change in price on the average base 1 mark 2 min
- 3 Business travellers' elasticity 2 marks 4 min
- 4 Vacationers' elasticity 2 marks 3 min
- 5 Interpretation of the difference 2 marks 3 min
- Check: arithmetic, units (₹, %), final answer underlined 1 min
Try it first. About 16 minutes for 8 marks. Write it out, then open the solution.
Solution
Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.
The mid-point formula. eD = (% change in quantity demanded) ÷ (% change in price), ignoring the minus sign; by the mid-point method each change is taken against the average of its two values:
eD = [ΔQ ÷ average Q] ÷ [ΔP ÷ average P].
Percentage change in price. The fare rises from $240 to $300: ΔP = 60 on an average of (240 + 300) ÷ 2 = 270, a change of 60 ÷ 270 = 22.22%.
(i) Business travellers. Tickets fall from 3,000 to 2,850: ΔQ = 150 on an average of 2,925, a change of 150 ÷ 2,925 = 5.13%. eD = 5.13% ÷ 22.22% = (150 ÷ 2,925) ÷ (60 ÷ 270) = 0.23: inelastic.
(ii) Vacationers. Tickets fall from 1,200 to 900: ΔQ = 300 on an average of 1,050, a change of 300 ÷ 1,050 = 28.57%. eD = 28.57% ÷ 22.22% = (300 ÷ 1,050) ÷ (60 ÷ 270) = 1.29: elastic.
| Average quantity | % change in quantity | % change in price | Elasticity | |
|---|---|---|---|---|
| Business travellers | 2,925 | −5.13% | +22.22% | 0.23 |
| Vacationers | 1,050 | −28.57% | +22.22% | 1.29 |
Why the two differ. Demand is less elastic when a good has few close substitutes and is a necessity, and more elastic when the buyer can easily put off the purchase or switch to something else. A business trip usually has to be made, on a set date, so business travellers buy nearly as many tickets at the higher fare. A holiday can be moved, shortened or taken by train or road, so vacationers cut back much more.
Answer. When the fare rises from $240 to $300, the mid-point price elasticity of demand is about 0.23 for business travellers (inelastic) and about 1.29 for vacationers (elastic).
Where the 8 marks sit
| # | Component | Marks |
|---|---|---|
| 1 | Mid-point formula | 1 |
| 2 | Percentage change in price on the average base | 1 |
| 3 | Business travellers' elasticity | 2 |
| 4 | Vacationers' elasticity | 2 |
| 5 | Interpretation of the difference | 2 |
| Total | 8 |
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