Question

The general public’s demand for flights to Florida has an elasticity of -2 all year round. Knowing that, a monopolistic airline has been optimally charging everyone $360 for a round trip. Next, the airline finds out that during spring break, the price elasticity of students’ demand for flights to Florida is -3. Given that information and assuming the airline can vary the number of daily flights, is there a way for the airline to increase its profit and what needs to be done for that?

a) Yes, the airline should charge students a higher price.

b) Yes, the airline should give students a price discount.

c) Yes, it will be profitable for the airline to only serve students.

d) No, elasticity of demand is irrelevant for pricing decisions.

Answer 1

Answer : The answer is option b.

In absolute value here the price elasticity of demand for flights by general public is 2 and by students is 3. Here the price elasticity of demand by students is higher than the price elasticity of demand by general public. This means that here the student demand for flights is more elastic than the general public demand. For elastic demand if price fall then the total revenue increase and this increase the firm's profit level. As here the student demand for flight is more elastic than the general public demand hence the airline should provide a price discount to students. This will increase the student quantity demanded for flights which will increase the total revenue of airline. As a result, the profit of airline will increase. Hence except option b other options are not correct. Therefore, option b is the correct answer.