Question

An airline company currently sells a package of deal for a $100 return ticket and sells 5000 tickets per week. Because of the high demand, the company raises its fare to $120 per ticket hoping to raise its revenue. If the price elasticity of demand is currently -1.2, what will be the sale of tickets per week and how will this affect total revenue? What conclusions do you draw from this exercise?

Answer 1

Following values have been given

P0 = $100

Q0= 5000

Price elasticity of demand (Ed) = -1.2

P1= $120

Ed= % change in quantity/ % change in price

Ed= [(Q1-Q0/Q0)/(P1-P0/P0)]*100

Substituting the values given

(-)1.2= [(Q1-5000)/5000/(120-100)/100]

(-)1.2= [(Q1-5000)/5000/(1/5)]

(-)1.2= [(Q1-5000)/1000]

-1200 = Q1-5000

3800 = Q1

So quantity decreased by 1200 and is 3800 tickets

Old revenue = $100*5000= $500000

New Revenue = 3800*120= $456000

Revenue reduced when the price of ticket increased.

Conclusion : We have a negative relation between demand and price of tickets . As the price increased , the quantity demanded reduced according to the elasticity of demand and hence the revenue reduced because the sale of tickets reduced.

(You can comment for doubts )