Principle of Econ Hw2

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

Price 150 200 250 300

Quantity Demanded (business travelers) 2100 2000 1900 1800

Quantity Demanded (vacationers) 1000 800 600 400

a) As the price of tickets rises from \$200 to \$250, what is the price elasticity of demand for (i) business travelers and (ii) vacationers? (Use the midpoint formula in your calculations.)

b) Why might vacationers have a different elasticity from business travelers?

Solution:

a.(i) Price elasticity of demand for business travelers

= (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2] =[(1900-2000)/(3700/2)]/[(250-200)/(4500/2)]

=-0.23 elasticity = 0.23 so, it is inelastic demand

ii) Price elasticity of demand for vacationers

= (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2] = [(600-800)/1400/2]/[(250-200)/450/2]

= -1.29 elasticity = 1.29 so, it is elastic demand.

b. the business travelers’ timetable is not flexible. They have fixed meeting and tasks. So they have inelastic demand. While the vacationers can change their travel plans, change their ways of transportations. So that’s why the price elasticity of demand for them is different.

4.11. Consider public policy aimed at smoking.

a. Studies indicate that the price elasticity of demand for cigarettes is about 0.4. If a pack of cigarettes currently costs \$2 and the government wants to reduce smoking by 20 percent, by how much should it increase the price?

b. If the government permanently increases the price of cigarettes, will the policy have a larger effect on smoking 1 year from now or 5 years from now?

c. Studies also find that teenagers have a higher price elasticity than do adults. Why might this be true?

Solution: a. we use mid-point method to solve this.

E= ΔQ% / ΔP%

ΔQ% = -20%

E=-0.4 = -20% / ΔP%

ΔP% = -20% / -0.4 =...