Eastern Airlines offers coach seats on its flight from Milwaukee to New York for $250. Sales have averaged 700 per day during the last year. Eastern’s primary competitor (Continental Airlines) cut their prices from $220 to $200. The quality of travel is the same between airlines (no special cookies!). However, due to brand loyalty, the prices are not the same. Eastern Airlines witnessed a decrease in traffic from 720 to 650.
a. What is the arc cross elasticity of demand between Eastern’s flights and Continental’s flights.
b. If Eastern Airlines knows the arc price elasticity of demand for its airplane tickets is -2.12, what price would they have to charge in order to obtain the same level of sales as before Continental’s price cut?