Answered: Imagine you work as an economist for a…

Microeconomics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506893

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter7: Consumer Choice And Elasticity

Section: Chapter Questions

Problem 13CQ: Suppose Erin, the owner-manager of a local hotel projects the following demand for her rooms: a....

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Imagine you work as an economist for a particular airline (A). Your job entails estimating the passenger demand for airline travel provided by A. Accordingly, you estimate the following:

Price elasticity of demand for A’s service = 3

Cross elasticity of demand for A’s service (with respect to airline B’s price) = 2

Income elasticity of demand for A’s service = 1

Making sure to show all of your work, if consumer income falls by 5% (due to a recession), and at the same time airline B lowers its price by 10%, all else equal, what would you specifically recommend A due to its price to maintain its quantity of passengers (i.e., lower or raise its price and by what percent)? Hint: Elasticities are ratios of percentage changes.

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