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The price elasticity of demand for plane rides is 0
The price elasticity of demand for plane rides is 0.5. The price elasticity of demand for train rides is 0.2. The cross elasticity of demand for train rides with respect to the price of a plane ride is 0.4. If the price of the plane ride rises by 10 percent, what is the percentage change in the price of a train ride that will lead to no change in the quantity demanded of train rides?
Expert Solution
The price of train ride will increase by 8%.
Suppose the price of a train ride increase by a percent, then the quantity demanded for train will drop by 0.5*a percent. Since trains and planes are substitutes, a 10 percent increase in price of plane rides will increase quantity demanded for train rides by 10%*0.4 = 4%. For there to be no change in the quantity demanded for train rides, we must have 0.5*a = 4, or a = 8.
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