a. Suppose that a 20 percent increase in the price of jet fuel causes a 5 percent decrease in the consumption of jet fuel. What is the price elasticity of demand and do you think this is a realistic number? Explain why (hint: discuss the determinants of elasticity).

b. In a recent fare war, West-Jet reduced the price of its one-way airfare from Vancouver to Winnipeg from $198 to $138 to match Air Canada. West-Jet matched the fare reluctantly, saying it would cost the company millions of dollars in revenue for those tickets to be sold for less. Air Canada, on the other hand, believed the fare cut would increase its revenue even if rival airlines matched the lower fares. What different assumptions about the underlying price elasticity of demand for airline tickets on that route did each airline believe true?

Answer rating: 100% (QA)

a Elasticity ... View the full answer