Question

The Transportation Authority of Buck Snort, Tennessee raised the bus fares from $.25 to $.30 on January 1, 2016. The authority’s ridership statistics show that the number of passengers riding buses decreased from 25,000 in 2015 to 20,000 in 2016.

a.  What happens to the revenues the TA collects from ridership as a result of the fare change?

b.  What is the arc price elasticity of demand for bus fares?

c.  Suppose the TA did notadjust the bus fares as indicated in the original statement of the problem, but rather observed the change in ridership over the period as a result of a change in consumer incomes. Suppose you know that consumer incomes in this market were, on average, $40,000 in 2015. Further suppose that you know that the arc income elasticity over the 2015-2016 period is -2. What happened to average consumer income over this period given what you know about ridership over the period?

Answer 1