1 point possible (graded) Suppose that the transit authority for City A estimate
ID: 1120311 • Letter: 1
Question
1 point possible (graded)
Suppose that the transit authority for City A estimates the price elasticity of demand for the current subway system to be -0.5. Using the definition of price elasticity of demand
Which of the following situations are consistent with this measurement? Check all that apply.
a) A 100% increase in price resulted in a ridership decrease by about half.
b) A 100% increase in price resulted in ridership decreasing by about half a million riders.
c) A 50% decrease in price resulted in ridership increasing about 100%.
d) A decrease in price of fifty cents resulted in ridership increasing by about 100%.
e) A 100% increase in price resulted in ridership decreasing by about 50%.
f) An decrease in price of 2% resulted in about a 1% increase in ridership.
g) A 1% increase in price means ridership will decrease by 2%.
Explanation / Answer
Price elasticity of demand = ( change in quantity demanded / change in price).
a) change in price= 100 and elasticity = - 0.5
So, the change in quantity demanded= ( change in price x elasticity )= 100x (- 0.5) = - 50
It means ridership decreases (negative sign indicates a decrease) by 50 = 1/2.
b) we can't determine if the ridership decreases by half a million riders as what quantity was demanded initially isn't given .
c) A 50 decrease in price will increase ridership by (-50 x (-0.5))= 25.
d) this can't be determined as we don't know the initial price and quantity.
e) A 100 increase in price will change quantity demanded by (100x (-0.5))= - 50 i.e. ridership decreases by 50
f) decrease in price of 2 will increase ridership by ((-0.5)x(-2))= 1
G) increase in price of 1 will change quantity demanded by (-0.5x1)= - 0.5 i.e. ridership decreases by 0.5
Answer- option (a), (e), (f)
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