Reference no: EM132953350

The Dallas Morning News reported the findings of a study by the Department of Transportation that examined the effect on average airfares when new, low priced carriers, such as Southwest Airlines or Vanguard Airlines, entered one of the three city-pair markets: Baltimore-Cleveland, Kansas City-San Francisco, or Baltimore-Providence. Use the following excerpts from the newspaper article to calculate the arc elasticity of demand for each of the three city-pairs. How do the three computed elasticizes compare? Based on the computed elasticizes, describe travelers'' responsiveness to the reduction in airfares.

• "(In) Baltimore and Cleveland for example, ...just 12,790 people 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) Kansas City-San Francisco connection... during the last quarter of 1994 some 35,960 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."