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The New York Times reported (Feb. 17, 1996, p. 25) 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 a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.a. Use these data to estimate the price elasticity of demand for subway rides.b. According to your estimate, what happens to the Transit Authoritys revenue when the fare rises?c. Why might your estimate of the elasticity be unreliable?
a) Elasticy is the measure of the %change in quantity divided by the %change in price. They give us the -4.3 as the percent change in ridership, and we calculate the price change as .25/1.25 or a 20% change in price. Our price elasticity of demand is -4.3/20 or -.215 b)According to my estimateTransit Authoritys revenue in previous dec = X*1.25 and in Dec 1995 = X*95.7%*1.5 = X*1.4355 89 million riders in dec 95 paid 1.5 for a total revenue of…

,000 or an increase of $17,220,940 Hence when fares rise, revenue increases. c) Elasticity may be unreliable because the given information does not state the changes in fares of alternative modes of transport. Also, the change in fare is about 20% while the formula for price elasticity is for small changes.



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