Question

"Delta Air Lines Inc., the nation's No. 2 airline by traffic, says that for every $1 increase in the passenger facility charge, passenger demand declines by more than 1%." What additional information is needed to calculate price elasticity of demand for air travel?

2. Why do airports support bumping federal taxes and fees on airline tickets, while airlines oppose increases?

3. Should Congress approve increases in taxes and fees on air travel? What would be the effect on the demand for air travel? What would be the effect on airline profits?

Answer 1

1 Since it mentions 1 dollar change in charge, we need initial level of passenger facility charge. We also need initial passenger demand. This is because we need to calculate proportional change in charge and proportional change in demand to calculate elasticity

2 Airports support it because such proposal increases their funds and they can modernise airports. Airliners oppose because they fear loss in demand for air travel.

3 Demand for air travel will decrease because it raises cost of air travel. Airline profits will also decline due to fall in revenue particularly when demand falls by more than 1% in response to 1 dollar increase in charge.