In an economy, long distance travel is usually provided by high-speed rail and coaches. The

fares of high-speed rail are in general higher than the coach fares. Consider a high-speed rail

company that offers two classes of seats in its rides, a small number of premium seats at a

higher price and a large number of economy seats at a relatively lower price. The company has

increased the ticket prices recently for both seats to cover the higher operational costs. The

prices and quantities sold for both seats before and after the price hike is shown in the table

below.

Economy Seats Premium Seats

Price Quantity Price Quantity

$30 280 $200 50

$45 140 $300 40

(a) Calculate the price elasticity of demand for both seats using the mid-point method and

classify the two seats based on the price elasticity of demand.

(b) Refer to the factors that affect the price elasticity of demand and explain with two (2)

reasons why the two classes have the different price elasticity of demand. What should

the company do to earn more revenue from both seats? Explain.

(c) What are the expected signs of the income elasticity of demand for high-speed rail and

the cross elasticity of demand between high-speed rail and coaches. How does

information on these elasticities help the high-speed rail company in business

decisions? Explain.