3. If the average price of an airline ticket on a certain route rises from $200 to $250, the number of tickets sold drop from 800 to 600. Calculate the price elasticity of demand. Is the demand elastic or inelastic?

-Price elasticity of demand=0.77

-The demand is inelastic because the elasticity is 0.77 and this number is less than 1.

Explanation:

The formula to calculate the price elasticity of demand is:

Price elasticity of demand=% change in the quantity demanded/% change in the price

To use this formula you have to calculate the % change in the quantity demanded and % change in the price:

% change in the quantity demanded = (Q2-Q1 / ((Q2+Q1) / 2)) * 100

% change in the quantity demanded = (250-200 / ((250+200) / 2)) * 100

% change in the quantity demanded = (50 / (450/2)) * 100

% change in the quantity demanded = (50/225) * 100

% change in the quantity demanded=22.22%

% change in the price = (P2-P1 / ((P2+P1) / 2)) * 100

% change in the price = (600-800 / ((600+800) / 2)) * 100

% change in the price = (-200 / (1400/2)) * 100

% change in the price = (-200/700) * 100

% change in the price=-28.57%

Now, you can replace the values in the formula to to calculate the price elasticity of demand:

Price elasticity of demand = 22.22%/-28.57%

Price elasticity of demand=0.77

The price elasticity of the demand is 0.77. An elastic demand is when the elasticity is greater than 1 and an inelastic demand is when the elasticity is less than one. So, according to this, the demand is inelastic because the elasticity is 0.77 and this number is less than 1.