Question

During spring break, students have an elasticity of demand for a trip to Florida of -4. How much should an airline charge students free ticket if the price it charges the general public is $360? Assume the general public has an elasticity of -2.

multiple choice:
A) $240
B) $250
C) $240 (not sure why question has 240 twice)
D) $270

Answer 1

The question asks for the price an airline should charge students with a higher price elasticity of demand for a trip to Florida compared to the general public. Based on the elasticities provided, students should be offered a lower price to increase demand. The most reasonable answer is $240, the lowest of the given choices.

Step-by-step explanation:

The question presented is a business economics problem related to price elasticity of demand. The elasticity of demand indicates how sensitive the quantity demanded is to a change in price. When the elasticity of demand is high (in absolute value terms), consumers are more responsive to price changes. The student's question involves calculating the price students should be charged for a ticket to Florida during spring break, given that their elasticity of demand is -4 compared to the general public's elasticity of -2 at a $360 price point.

To solve this problem, you would typically use the elasticity of demand formula, but the question provides the elasticities up front and appears to be asking for an application of the concept rather than a strict mathematical solution. Given that the student's elasticity is double (in absolute value) that of the general public's, one might expect them to be charged a price that is significantly lower to increase the quantity demanded. However, since the problem does not provide a clear way of linking the elasticity directly to a particular price point or a revenue maximization model, we cannot definitively compute the answer based on the information given. From the available choices, the most reasonable answer would be the lowest price, which is option A) $240, assuming the airline aims to increase the quantity demanded by offering a lower price to a more price-sensitive demographic such as students on spring break.

Answer 2

To calculate the price that an airline should charge students for a free ticket to Florida during spring break, we can use the concept of elasticity of demand. The elasticity of demand for students is -4 and the price for the general public is $360. Based on this, the airline should charge students approximately $345.60 for a free ticket.

Step-by-step explanation:

To calculate the price that an airline should charge for a free ticket to students during spring break, we can use the concept of elasticity of demand. Elasticity of demand measures the responsiveness of demand to changes in price. The formula for elasticity of demand is:

Elasticity of Demand = % Change in Quantity Demanded / % Change in Price

Given that the elasticity of demand for a trip to Florida for students is -4 and the price for the general public is $360, we can calculate the change in price as follows:

% Change in Price = (Price for General Public - Price for Students) / Price for General Public = ($360 - 0) / $360 = 1

Since the elasticity of demand for students is -4, we have:

-4 = % Change in Quantity Demanded / 1 ⟶ % Change in Quantity Demanded = -4

This means that for every 1% increase in price, the quantity demanded for students will decrease by 4%. Therefore, the airline should charge students a price that is 4% of $360, which is $14.40. Hence, the airline should charge students approximately $360 - $14.40 = $345.60 for a free ticket.