Transatlantic air travel in business class has an estimated elasticity of demand of \(0.62, \quad\) while transatlantic air travel in economy class has an estimated price elasticity of 0.12. Why do you think this is the case?

Price elasticity of demand is a measure of the responsiveness of the quantity demanded for a product or service with respect to the changes in its price. It is calculated as the percentage change in quantity demanded divided by the percentage change in price.

The given price elasticity of demand for transatlantic air travel in business class is 0.62. This means when the price of a business class ticket increases by 1%, the quantity demanded for business class travel decreases by 0.62%. In general for products, a higher price elasticity indicates that the product's demand is more sensitive to price changes.

The given price elasticity of demand for transatlantic air travel in economy class is 0.12. This means when the price of an economy class ticket increases by 1%, the quantity demanded for economy class travel decreases by 0.12%. For products with lower price elasticity, demand is typically less sensitive to price changes.

Comparing the two elasticities, we notice that the price elasticity of demand for business class travel (0.62) is higher than that of economy class travel (0.12). This implies that demand for business class travel is more sensitive to price changes compared to economy class travel.

There may be several reasons for the difference in price elasticity of demand for business and economy class travel: 1. Different target customer segments: Business class travelers are often corporate clients that are more likely to be price-conscious and switch to economy class or an alternative service in response to price increases. Economy class travelers typically prioritize affordability, so a small increase in price may not lead to a significant change in demand for these consumers. 2. Substitutes Availability: Business class travelers have more alternatives, such as video conferencing or other modes of transport. In contrast, economy class travelers may have fewer substitutes available, making them less likely to switch due to price changes. 3. Income effect: Higher income individuals tend to be less sensitive to price changes, and they usually travel business class. Meanwhile, lower-income individuals are more sensitive to price changes, but since they are already traveling economy class, a small increase in price may not significantly impact their decision. In conclusion, the elasticity of demand for transatlantic air travel differs between business and economy class because of the variations in customer segments, the availability of substitutes, and income levels. The demand for business class travel tends to be more sensitive to price changes, while the demand for economy class travel is less sensitive.