Question

1. In the article below, calculate the arc price elasticity of demand for air travel for each of the three city pairs mentioned. Show your work.

Dallas Morning News August 30, 1997, p. 2F

Federal study documents effects of low-fare airlines

WASHINGTON - Fares plum­met and passenger loads sky­rocket when a low-price airline starts flying between a pair of cities.  Baltimore and Cleveland, for example. Just 12,790 people flew between those cities in the last three months of 1992, at an aver­age fare of $233.  Then Dallas-based Southwest Airlines entered the market.  In the last three months of 1996, 115,040 people flew between the cities at an average fare of  $66.

         Curious about the exact impact of low-cost carriers, the Transportation Department ana­lyzed fares and passenger flow across the country. The Baltimore-Cleveland figures were one result.  "The fares that many low-fare carriers charge can greatly expand the air travel market, enabling many who would other­wise not travel by air to do so," the department reported.  Indeed, there are a huge num­ber of Americans who want to fly if they can get low enough prices, a department analyst said.

Take the Kansas City-San Fran­cisco connection, for another, example.  In the last quarter of 1994 some 35,690 people made the trip at an average fare of $165.  Two years later, after the arrival of Van­guard Airlines, fares had dropped to an average of $107and traffic had nearly doubled to 68,100.

         Or the Baltimore-Providence, R.I., route, where the average fare fell from $196to $57and the num­ber of passengers carried jumped from 11,960 to 94,116.

The study also found 19 routes where things went the other way. - Associated Press

Answer 1

Arc-price elasticity (Ed) = (Change in quantity / Average quantity) / (Change in price / Average price)

(1) Baltimore & Cleveland

Ed = [(115,040 - 12,790) / (115,040 + 12,790)] / [(66 - 233) / (66 + 233)]

= (102,250 / 127,830) / (- 167 / 299)

= -1.43

(2) Kansas City & San Francisco

Ed = [(68,100 - 35,690) / (68,100 + 35,690)] / [(107 - 165) / (107 + 165)]

= (32,410 / 103,790) / (- 58 / 272)

= -1.46

(3) Baltimore & Providence

Ed = [(94,116 - 11,960) / (94,116 + 11,960)] / [(57 - 196) / (57 + 196)]

= (82,156 / 106,076) / (- 139 / 253)

= -1.41