Microeconomics Additional Cost Charge

Question: Describe about the Microeconomics for Additional Cost Charge. Answer: 1. Business passengers are less sensitive to price. This allows the airlines the potential opportunity to charge additional costs arising from the price-based policy instruments to the passengers (Brons et al., 2002). The business passengers can, therefore, be charged more than the proportional without decreasing the demand. This explains why the estimated elasticity of demand (0.4) for transatlantic air travel in business class is less than that of the economy class at 0.62. This indicates that with a slight change in price for the economy class which is highly sensitive to price, there will be a bigger change in demand hence the higher elasticity for economy class than business class. 2. A slope of a straight-line demand with a constant slope has constantly altering elasticity. The measured elasticity increased as one moves up the demand curve to higher prices and lower quantities (Bass, 2010). The explanation is based on concept of elasticity itself that is percentage change-based (amount of change and starting point of the change). Since the slope is fixed, unit change is identical for individual segment on the curve but the base values are changing. References Bass, F. M. (2010). The relationship between diffusion rates, experience curves, and demand elasticities for consumer durable technological innovations. Journal of Business, S51-S67. Brons, M., Pels, E., Nijkamp, P., Rietveld, P. (2002). Price elasticities of demand for passenger air travel: a meta-analysis. Journal of Air Transport Management, 8(3), 165-175.