applied problem
The Dallas Morning News reported the findings of a study by the Department of Trans- portation that examined the effect on average airfares when new, low-priced carriers, such as Southwest Airlines or Vanguard Airlines, entered one of three city-pair markets: Baltimore–Cleveland, Kansas City–San Francisco, or Baltimore–Providence. Use the fol- lowing excerpts from the newspaper article to calculate the arc elasticity of demand for each of the three city-pairs. How do the three computed elasticities compare? Based on the computed elasticities, describe travelers’ responsiveness to the reductions in airfares.
- “(In) 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.”
- “(On)theKansasCity–SanFranciscoconnection…(during)thelastquarterof1994 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 $107 and traffic had nearly doubled to 68,100.”
- “On the Baltimore–Providence, R.I., route, where the average fare fell from $196 to $57, . . . the number of passengers carried jumped from 11,960 to 94,116.Please see the attachment
