A budget airline cuts the price of an economy seat on a domestic route from $120 to $90. As a result, the quantity of seats demanded on that route rises from 1000 to 1500 per month. What is the price elasticity of demand (PED) for economy seats on this route?

IGCSE Economics 0455: PED When an Airline Cuts Its Price

Step 1: Recall the PED formula

$PED = \frac{\%\ \text{change in quantity demanded}}{\%\ \text{change in price}}$

Step 2: Calculate the percentage change in price

Using the original price of $120 as the base: $\%\Delta P = \frac{90-120}{120}\times100 = \frac{-30}{120}\times100 = -25\%$

Step 3: Calculate the percentage change in quantity demanded

Using the original quantity of 1000 as the base: $\%\Delta Q_d = \frac{1500-1000}{1000}\times100 = +50\%$

Step 4: Apply the PED formula

$PED = \frac{50}{-25} = -2.0$

Ignoring the sign, the size of PED is $2.0$ . Since $2.0 > 1$ , demand for economy seats on this route is price elastic. Quantity demanded is more responsive, proportionately, than the change in price.

Step 5: Rule out the other options

Option B ( $-0.5$ ) comes from inverting the formula, dividing the percentage change in price by the percentage change in quantity demanded instead of the other way round.
Option C ( $2.0$ ) drops the negative sign, losing the information that price and quantity demanded moved in opposite directions.
Option D ( $0.5$ ) makes both errors at once, inverting the ratio and dropping the sign.

Final answer

$PED = \boxed{-2.0}$ , option A. Demand for economy seats on this route is price elastic.