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Arc Elasticities of Demand

Round-off to 4 decimals

1. The arc price elasticity of demand for round-trip airline tickets from Houston to San Angelo is -2.5 between the new price of $765 per ticket and the original price.
Before the price change took effect San Angelo Transcontinent Airways (STA) sold 840 round-trip tickets per month and now, at the new price, it is selling 798 tickets per month.
Please find the original price?

2. The Current Arc cross elasticity of demand between New York to San Angelo and New York to Hawthorn round-trip airline tickets is -2.3989. With the New York to San Angelo flight priced at $640, STA sold 1,800 New York to Hawthorn tickets per month. How many Monthly New York - Hawthorn tickets can STA expect to sell at the new price of $577.60 per New York - San Angelo flight? Are New York to San Angelo and New Yor to Hawthorn tickets complimentary substitute products?

Solution Preview

1. Given
Ep=-2.5
P2=765
Q1=840
Q2=798
We know that
Ep = ((Q2-Q1)*(P1+P2)/((Q2+Q1)*(P2-P1))
-2.5 = ((798-840)*(765+P1))/((798+840)*(765-P1))
-2.5 = ...

Solution Summary

The solution calculates arc elasticities of demand for a number of questions.

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