In a study of the New York transit authority, an economist discovers that subway

Question

In a study of the New York transit authority, an economist discovers that subway ridership elasticity with respect to subway fares is -0.15 while the cross elasticity of demand for subways with respect to bus fares is 0.6

A. On the basis of the information given above, would a reduction in subway fares increase or decrease the transit authority's subway total revenue?Explain

B. If subway fares are expected to rise by one third (i.e., 33 percent), how will bus fares have to change (in percentage terms) so as to offset the effect of this increase in subway fares on subway rides demanded?

Explanation / Answer

A. The elasticity of subway ridership with subway fares is -0.15. This shows an inelastic demand. It means for a high change in price there is very small change in demand. Hence, even when prices are decreased demand will not change much and total revenue will go down. Hence it is not advised to decrease subway ride fares.

B. Cross elasticity of demand(Xed) between subway ride and bus is 0.6 which is positive, it means both these are substitutes to each other.

Formula is: Xed= % change in demand of buses/ % change in subway fares

0.6= x/ 33

Hence increase in subway fares will increase bus revenue by 19.8 %.

This value 19.8 % should be increase in bus fares.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.