4.) In this chapter, we calculated the likely long run change in revenue in NYC

Question

4.) In this chapter, we calculated the likely long run change in revenue in NYC were to raise mass transit fares from $2.00 to $2.50. Use the same procedure to calculate the short run impact of this fare hike.  This time, use an elasticity of 0.35, which is in the middle of the short run estimates in table 3.

Table 3:

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Table 3:

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Area of Study Short-Run Elasticity    
Long-Run Elasticity Gas United States 0.26 0.58
Britian 0.25 0.6 Electricity US-- New England 0.19 0.33
US Pacific Coast 0.19 0.25 Oil  US 0.06 0.45
France 0.07 0.57
Japan 0.07 0.36
Denmark 0.03 0.19 Mass Transit Multi-country 0.2 to 0.5 0.6 to 0.9

Explanation / Answer

This question is poorly worded, but it is asking for the percentage change in quantity that will result from a price increase from 2 to 2.5. That's what the questioner means by "impact." E=%changeQ / %changeP Plug in the values that are given, and let's call %changeQ "X" because that's what we are looking for. 0.35 = X2.25/(2.5-2) Here, we multiply by 2.25 because it is the midpoint of 2 and 2.5. Remember that we are calculating the percentage change, not the absolute change. From here, we can do some algebra. 0.35 = X2.25/(2.5-2) 0.35 = X2.25/(0.5) 0.35=5X X=0.35/5 X=0.7 So, the quantity of tickets sold will change by 7%

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