1. Suppose you are the city manager of a small Midwestern city. Your city-owned
ID: 1108511 • Letter: 1
Question
1. Suppose you are the city manager of a small Midwestern city. Your city-owned bus system is losing money, and you have to find a way to take in more revenue. Your staff recommends raising bus fares but bus riders argue that reducing bus fares to attract new riders would increase total revenue. You conclude that
a. your staff thinks that the demand for bus service is elastic, whereas the bus riders think that demand is inelastic
b. your staff thinks that the demand for bus service is inelastic, whereas the bus riders think that demand is elastic
c. both your staff and the bus riders think that the demand for bus service is elastic
d. both your staff and the bus riders think that the demand for bus service is inelastic
Explanation / Answer
Answer is b. Price elasticity of demand (PED) measures the responsiveness of quantity demanded due to change in price of the good, other things remaining the same. Price elasticity of demand = Percentage change in quantity demanded/Percentage change in price. PED is inelastic when quantity demanded is not affected by change in price. This is true for necessaries that have no substitutes. PED is elastic when a small change in price of the good, the quantity demanded increases a lot.
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