As the price of airline tickets from New York to Boston rises from $250 to $300, it’s important to assess the price elasticity of demand for both business travelers and vacationers using the midpoint method. Price elasticity of demand measures the responsiveness of the quantity demanded to changes in price. It’s a crucial concept in economics as it helps businesses and policymakers understand how sensitive consumers are to price changes, which, in turn, informs pricing strategies and policy decisions.

For business travelers, the initial price and quantity demanded at $250 are as follows: Price = $250, Quantity Demanded = 1,900 tickets. When the price rises to $300, the new price and quantity demanded become: Price = $300, Quantity Demanded = 1,800 tickets. To calculate the price elasticity of demand for business travelers, we can use the midpoint formula:

Price Elasticity of Demand (PED) = [(Change in Quantity Demanded) / ((Initial Quantity Demanded + Final Quantity Demanded) / 2)] / [(Change in Price) / ((Initial Price + Final Price) / 2)]

Using the data provided:

Change in Quantity Demanded = 1,800 – 1,900 = -100
Initial Quantity Demanded = (1,900 + 1,800) / 2 = 1,850
Change in Price = $300 – $250 = $50
Initial Price = ($250 + $300) / 2 = $275

Now, let’s calculate the PED for business travelers:

PED = [(-100) / 1,850] / [($50) / $275]
PED = (-100 / 1,850) / (50 / 275)
PED ≈ (-0.054) / (0.182)
PED ≈ -0.297

So, the price elasticity of demand for business travelers in this price range is approximately -0.297.

Now, let’s calculate the price elasticity of demand for vacationers using the same midpoint method:

Initial Quantity Demanded for Vacationers = (1,000 + 800) / 2 = 900
Change in Quantity Demanded for Vacationers = 600 – 900 = -300
Initial Price = ($250 + $300) / 2 = $275
Change in Price = $300 – $250 = $50

Now, let’s calculate the PED for vacationers:

PED = [(-300) / 900] / [($50) / $275]
PED = (-300 / 900) / (50 / 275)
PED ≈ (-0.333) / (0.182)
PED ≈ -1.830

So, the price elasticity of demand for vacationers in this price range is approximately -1.830.

Now, let’s interpret these results:

1. For business travelers, the price elasticity of demand is -0.297, which is less than 1 in absolute value. This means that business travelers are relatively inelastic in their demand for airline tickets in this price range. In other words, they are not very sensitive to price changes, as a 1% increase in price leads to less than a 1% decrease in quantity demanded.

2. For vacationers, the price elasticity of demand is -1.830, which is greater than 1 in absolute value. This indicates that vacationers are highly elastic in their demand for airline tickets in this price range. A 1% increase in price would result in a more than 1% decrease in quantity demanded.

Therefore, the demand for airline tickets in this price range is elastic for vacationers because they are highly sensitive to changes in price. In contrast, business travelers are relatively inelastic because they are less sensitive to price changes. This difference in price elasticity between the two groups suggests that airlines may need to consider different pricing strategies and marketing approaches to cater to these distinct customer segments effectively.