Question

The New York Times reported (Feb 17, 1996) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after the price of token increased 20 cents to $1.60, than in the previous December, a 5.3 percent decline.”

According to the quote above, what is the (approximate) price elasticity of demand in this region of the demand curve?

		- 0.40
		- 2.52
		- 39.75
		It is impossible to calculate from the information given.

Based on the previous elasticity, what happened to the Transit Authority’s total revenue when the fare increased?

		Total revenue increased
		Total revenue decreased
		Because there wasn't enough information to calculate elasticity, we can't be sure.

Answer 1

A). %ge change in quantity demanded (given) = 5.3

%ge change in price= (0.20÷1.40) ×100 = 14.28

Elasticity of demand is the %ge change in quantity demanded of the commodity divided by the%ge change in the price

= 5.3÷ 14.28 = 0.37 (approx 0.40)

The % decrease in quantity demanded is lesser than the% increase in the price. This shows an inelastic demand.

B). The transit Authority's total revenue will increase. It is because the demand for this public transit is inelastic, and in such case when fare increases, the total revenue also increases.