Question

Consider airfares on flights between New York and Minneapolis. When the airfare is $250, the quantity demanded of tickets is 2,000 per week. When the airfare is $280, the quantity demanded of tickets is 1,700 per week. Using the midpoint method, a the price elasticity of demand is about 0.70 and an increase in the airfare will cause airlines' total revenue to decrease. b the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines' total revenue to increase. c the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines' total revenue to decrease. d the price elasticity of demand is about 0.70 and an increase in the airfare will cause airlines' total revenue to increase.

Answer 1

Answer:

c the price elasticity of demand is about 1.43 and an increase in the airfare will cause airlines' total revenue to decrease.

Explanation:

q1 2,000 p1 250

revenue1 = quantity x price = 2,000x250 = 500,000

q2 1,700 p2 280

revenue2 = 1,700 x 280 = 476,000

Midpoint formula:

$E_p\frac{q_1-q_2}{\frac{q_1+q_2}{2}} \div\frac{p_1-p_2}{\frac{p_1+p_2}{2}}$

$\frac{2,000-1,700}{\frac{2,000+1,700}{2}} \div\frac{250 - 280}{\frac{250 + 280}{2}}$

$\frac{300}{1850} \div\frac{-30}{265}$

Ep = -1.432432432

As the price elasticity is above -1 the decrease in quantity is greater than the decrease in price thus, the revenue of the firm decreases if increase the price.