Question

Suppose that the price elasticity of demand for bus trips is equivalent to │ED│ = 0.5. While the income elasticity of demand for bus trips is equal to EI = - 0.1 and the cross elasticity of demand for bus trips with respect to the price of gasoline is E Bus, Gasoline = - 0.2.

to. Would an increase in the price of the bus ticket increase or
decrease the revenue of the bus company?

b. If the price of gasoline increases by 10%, then by how much the
quantity of bus rides demanded will change.

c. If the income of consumers increases by 5%, then by how much the
number of bus trips will change.

d. If the price of gasoline increases by 20%, then by how much the
quantity demanded of bus trips will change.

Answer #1

a. │ED│ = 0.5 which means that demand is inelastic. So, as price increase, revenue will also increase

b. E Bus, Gasoline = - 0.2 = Percentage change in quantity
demanded/Percentage change in price of gasoline

So, Percentage change in quantity demanded = (-0.2)*Percentage
change in price of gasoline = (-0.2)*(10%) = -2%

Thus, quantity of bus rides demanded will decrease by 2%.

c. EI = -0.1 = Percentage change in quantity demanded/Percentage
change in income

So, Percentage change in quantity demanded = (-0.1)*Percentage
change in income = (-0.1)*(5%) = -0.5%

Thus, quantity of bus rides demanded will decrease by 0.5%.

d. E Bus, Gasoline = - 0.2 = Percentage change in quantity
demanded/Percentage change in price of gasoline

So, Percentage change in quantity demanded = (-0.2)*Percentage
change in price of gasoline = (-0.2)*(20%) = -4%

Thus, quantity of bus rides demanded will decrease by 4%.

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