Chapter 5 Text Questions

3. Suppose the price elasticity of gasoline is 0.3 in the short run and 0.9 in the long run

No definition

3b.

Overtime people might prefer to drive their cars to work instead of car pooling, because they might see more value in that. As the gas price has decreased, driving their own car will not cost much and also they will be more independent regarding when to start or or leave from office.

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

Price: Qty Dem (Biz) Qty Dem (Vac) 150 2100 1000 200 2000 800 250 1900 600 300 1800 400

3a. If the price of a gallon of gasoline falls from $2.50 to $2.25, what happens to the quantity of gasoline demanded in the short run ?In the long run ?(Use the midpoint formula in your calculations.)

The percentage change in price = (2.25 - 2.50)/2.375 = 0.11 = 11%. The price elasticity in the short term is 0.3, so quantity demanded will rise by 0.3*.11 =33%. Since the long run elasticity is 0.9, it will rise by 0.9*0.11 = 99% in the long run.

Q2, Part B

b) For vacationers, travel is of less necessity compared to business travellers. Vacationers have longer time horizon for travel while the business travellers have a very short time to travel. Vacationers also have several other subsitutes like travelling by car. That substitute is not appropiate for business travellers as they need to reach faster to their place of destination. This is why vacationers will have a higher elasticity of demand for air tickets compared to the business travellers

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.)

i) Price elasticity for business travellers = (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2] = [(1900-2000)/1950]/[(250-200)/225] = -0.23 Therefore, elasticity = |-0.23| = 0.23

(ii) vacationers?

ii) Price elasticity for vacationers = (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2] = [(600-800)/700]/[(250-200)/225] = -1.29 Therefore, elasticity = |-1.29| = 1.29