CelebAir - Price Elasticity of Demand Exercise

Peter & Jordan have abandoned their celebrity makeover business and have decided to move into a much less risky industry. So they have launched their own private airline - CelebAir. Can an understanding of price elasticity of demand help them make the right business decisions?

The airline flies between London and Los Angeles and the custom-fitted plane has been flying for 2 months.

Since launch, the price of a return fare on CelebAir has been £5,000 and at this price CelebAir sells 20 tickets per week. However, Jordan wants to create a more exclusive feel to the CelebAir flying experience by attracting a more discerning clientelle. So she plans to increase the price of a return fare to £7,500 and expects that CelebAir will now sell 15 fares per week.

You are the marketing consultant to CelebAir and have just received a txt from Jordan asking you to provide answers to the following tasks:

(1) Assuming Jordan goes ahead with her plan to increase the price to £7,500, calculate the:

(a) Percentage change in demand
(b) Percentage change in price
(c) Elasticity of demand

(2) Thinking about total revenue per week:

(a) What is total revenue per week at current levels of demand
(b) What will total revenue per week be if Jordan goes ahead with the fare increase?
(c) Calculate the percentage change in total revenue between 2(a) and 2(b)

(3) Two months on and it turns out that Jordan got her estimate of CelebAir’s price elasticity of demand wrong. The correct Ped turns out to be 1.5. Assuming the price did increase from £5,000 to £7,500and Ped was 1.5, calculate:

(a) The weekly demand
(b) Total revenue per week
(c) The percentage change in total revenue compared with 2 (a)