Question

In 2017, the Metropolitan Transportation Authority (MTA) in New York City raised the price of a monthly subway pass from $116.50 to $121.00. According to an article in the New York Times, “Officials at the authority have said they must raise fares every two years to pay for the rising costs of providing service.”

1. In order for the MTA’s strategy for covering its rising costs to be successful, what must be true about the price elasticity of demand for subway passes?

Answer 1

It has been provided that Metropolitan Transportation Authority in New York City is raising prices of monthly subway pass.

This was being done to cover the rising costs of providing service.

This strategy of MTA indicates that MTA is expecting an increase in total revenue due to price increase and this increase in total revenue would be sufficient to cover the additional costs of providing service.

An increase in price leads to increase in total revenue only when the demand is inelastic.

So,

In order for the MTA's strategy for covering its rising costs to be successful, the demand for subway passes must be inelastic.

Only in such case, an increase in price will lead to an increase in total revenue that would enable the MTA to cover the rising costs of providing service.