Marking Scheme for Nov 2009 9708/21

Hello guys,

Here's the answers for yesterday's classwork. Hope u attempted all first before checking the answers here.

1 (a) (i) State the formula used to calculate income elasticity of demand.            [2]

            YED = % change in Quantity demanded
                      __________________________
                              % change in Income

        (ii) What can be concluded about air travel from Fig. 1?                            [2]
           
              Air travel is a normal good since YED is +1.1. It is income elastic because a change in
              increase will cause demand for air travel to increase by more than a proportionate change in
              income.

    (b) Using Fig. 2, explain a likely reason for the different price elasticity values for

         (i) business flights compared with leisure flights                                       [3]

              Business flights have a PED of 0.3 and 0.7 for long distance and short distance respectively.      
              This means that business flights are more inelastic than leisure flights. A likely reason for this
              is, there is no choice or substitutes for time of travel or destination and any price increase will
              be borne by the traveller's firm rather than the traveller. Thus, demand for business flights are
              more inelastic.

          (ii) long distance flights compared with short distance flights                  [3]

               Long distance flights have a PED of 1.3 and short distance flights have a PED of 2.2 which
               means that long distance flights is less elastic than short distance flights. The likely reason for
               this is, fewer substitutes exist for long distance flights and usually involves longer time
               periods and higher costs thus making price rises less significant in total cost.

      (c) Explain the significance of the price elasticity values in Fig. 2 for an airline considering a policy
           of fare cutting.                                                                                       [4]

           Cutting fares will increase revenue when demand is elastic but not when demand is inelastic or
           unitary elastic. It will raise revenue with short distance leisure flights but not with long distance
           leisure flights. It will also not raise revenue with the two types of business flights.

      (d) Discuss the costs and benefits of an increased demand for air travel       [6]

            Increased demand for air travel will benefit businesses where profits will increase and there will
            be possible expansion in business and new markets. Individuals will also benefit through
            increase mobility, leisure and employment because as businesses expands more labour is
            needed. The economy will also benefit in terms of growth.

            The costs, however, will include negative externalities such as pollution, noise and visual
            intrusion. The depletion of resources is also another cost in terms of the fuel and tyres an
            aircraft needs.