Question

25. Transatlantic air travel in business class has an estimated elasticity of demand of 0.62, while transatlantic air travel in economy class has an estimated price elasticity of 0.12. Why do you think this is the case?

Answer 1

It has been provided that transatlantic air travel in business class has an estimated elasticity of demand of 0.62 while transatlantic air travel in economy class has an estimated price elasticity of 0.12.

The value of elasticity of demand is higher for air travel in business class.

This means that demand is more elastic for air travel in business class relative to air travel in economy class.

The fares of business class is much higher than the economy class.

So, with respect to the air travel, traveling in the business class is luxury while traveling in economy class is necessity (as there is no third way to travel by air).

Luxury goods have more elastic demand.

Thus, being a luxury good, air travel in business class have higher value of elasticity of demand or have more elastic demand relative to air travel in economy class.