CRITICAL THINKING QUESTIONS 1
Transatlantic air travel in business class has an estimated elasticity of demand of 0.40 less than transatlantic air travel in economy class, with an estimated price elasticity of 0.62. Why do you think this is the case?
The Answer :
As we know that elasticity is a measure of a variable's sensitivity to a change in another variable, most commonly this sensitivity is the change in price relative to changes in other factors. For business travelers, it is relatively more necessary than other people. Also, businessmen take their business travel in business class more often. As a result, businessmen are more inelastic.
Income is one of the key factors that cause the different results. Assume the fare of a transatlantic air journey in business class is $2,000 and in economy class, It's $800. Suppose a businessman's income is $30,000 per year and the average wage is $4,000 per year. For most people, a 10% change in the price is a very different feeling. For instance, a 10% change in the price of air journey in business class is $200 and a 10% change in the price of air journey in economy class is $80. As you can see, the $200 is only 0.6% compared to the $30,000 per year income, but the $80 is 2% compared to the average wage. If you compare the result with the time they have to work for it, the result will be much more clear. Suppose they all have to work 8 hours a day and 20 days a week. While the businessman has to work about only one extra hour for the extra fare charge, the people who only get average pay have to work extra 3.2 hours, It's 3.2 times more.
The total assets value is also one of the key factors. For example, if your total asset is $3,000,000, you probably just ignore the extra $200 and decide within one second. Conversely, if your total asset is $90,000, you may cancel the deal also in one second.
CRITICAL THINKING QUESTIONS 2
Suppose you could buy shoes one at a time, rather than in pairs. What do you predict the cross-price elasticity for left shoes and right shoes would be?
The Answer :
If the two goods are complements, like toast and peanut butter, then a drop in the price of one good will lead to an increase in the quantity demanded of the other good. In this case, left shoes and right shoes are complements which means the price for left shoes drop, will lead to an increase in the quantity demanded of right shoes.
Reference
OpenStax College. (2016). Principles of economics. http://cnx.org/contents/69619d2b-68f0-44b0-b074-a9b2bf90b2c6@11.330
Hayes, A. (2020, January 30). Learn About Elasticity. Retrieved from https://www.investopedia.com/terms/e/elasticity.asp
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