Question

2. Suppose you are the administrator in charge of setting tolls for the Lincoln Tunnel. At the current toll of $6/passage, 20,000 passages per hour are taken across the tunnel. If the (absolute value of the) price elasticity of demand for trips is 0.4 and you want to decrease the number of passages per hour by 10 percent, what toll should you charge? What happens to revenue when you do so?

Answer 1

Price elasticity of demand = 0.4

Price = $6

Number of passages = 20,000

Price elasticity of demand = (% change in number of passages/ % change in toll charge)

0.4 = (10/ % change in toll charge)

% change in toll charge = 10/0.4 = 25

This means that if we want to decrease the number of passages per hour by 10 percent ,then toll charge should increase by 25%. This means ,toll charge should be ($6) + (6)(25%)= $ 7.5

Because the elasticity of demand is inelastic and there is increase in price, this means that the revenue would increase.