Each of the following situations contains an assumption about price elasticity of demand. What is the assumption? For each situation state whether the assumption is accurate and explain your reasoning. a. Sky King, world traveler, says if the airlines want to increase total revenue, they should lower fares for business travelers as well as for vacationers.
b. Both groups should respond equally to a price decrease
c. Bill Smith, a candidate for the state legislature, is proposing a large increase in the tax on cigarettes and liquor. He says "I'm not proposing these taxes to raise revenue but to discourage reckless drinking and the filthy smoking habit. If the price of cigarettes and liquor go up, the majority of people will quit using them. After all no one needs to smoke or drink?"

a. Sky King, world traveler, says if the airlines want to increase total revenue, they should lower fares for business travelers as well as for vacationers.

Sky King is assuming that the demand for airline tickets is price elastic, This means that a small decrease in the price of airline tickets will result in a proportionally larger increase of the quantity demanded. This will ultimately result in an increase of total revenue, e.g. price decreases by 5%, but quantity demanded in creases by 15%.

b. Both groups should respond equally to a price decrease

I guess that this question is related to the first question. If both groups of consumers respond equally to a price decrease, it means that both groups have exactly the same price elasticity of demand. This is usually not very common, theoretically it is possible, but generally business travelers have a more inelastic demand while vacationers tend to have a more elastic demand.

c. Bill Smith, a candidate for the state legislature, is proposing a large increase in the tax on cigarettes and liquor. He says "I'm not proposing these taxes to raise revenue but to discourage reckless drinking and the filthy smoking habit. If the price of cigarettes and liquor go up, the majority of people will quit using them. After all no one needs to smoke or drink?"

Bill believes that both cigarettes and liquor have an elastic demand since he believes that an increase in the price of cigarettes and liquor will result in consumers quitting. It applies the same logic as the first scenario, but on an inverse situation. You want to lower consumption, and increasing the price should do it. empirical evidence suggests that Bill is wrong, since people who like to drink or smoke will continue to do it regardless of the price. They might change for cheaper brands or ultimately, they will stop consuming other goods in order to be able to afford consuming cigarettes and liquor. Alcohol is by far the most dangerous and lethal drug in the world and the main problem with it is that people will do anything to get it. I'm not so sure about cigarettes, but since it also develops an addiction, the bad effects should be the same.

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