Question

Suppose an airline determines that its customers traveling for business have inelastic demand and its customers traveling for vacations have an elastic demand. If the airline's objective is to increase total revenue, it should _______.A. decrease the price charged to vacationers and increase the price charged to business travelers.

B. decrease the price to both groups of customers.
C. increase the price for both groups of customers.
D. increase the price charged to vacationers and decrease the price charged to business travelers.

Answer 1

A. Decrease the price charged to vacationers and increase the price charged to business travellers.

Step-by-step explanation:

Elasticity is the responsive change in demand to price change.

Elastic demand means demand change responds more to price change. Price & Total revenue are negatively related in this case.

Inelastic demand means demand change responds less to price change. Price & Total revenue are positively related in this case.

So, Airlines objective being Total revenue maximisation :

• It should increase price for people with inelastic demand i.e business travellers, as price & total revenue are positively related in inelastic demand.
• It should decrease price for people with elastic demand i.e vacationers, as price & total revenue are inversely related in elastic demand.