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%.