Question

Some years ago, the Harris County Toll Road Authority raised basic car tolls by 25 cents to $1.25 for cash payment and $1 for EZ TAG users. Six months later, there was a 23.8 percent increase in revenue compared with the same period the previous year. There were also 0.6 percent fewer motorists using the tollways than in the same six-month period the year before. Was usage of the toll roads elastic, unitary, or inelastic? Explain 2 ways the 6-month quantitative information (data) in the article back up your answer. When calculating elasticity, use: • the cash (not EZ Tag) data • the general (definitional) formula, not the midpoint formula Show your calculation (e.g., formula and numbers used).

Answer 1

Price Elasticity of demand is the responsiveness of the quantity demanded to the percentage change in price.

Price Elasticity of Demand = Percentage change in Quantity demanded / Percentage change in Price

If the price elasticity is greater than 1, it is said to be elastic in nature.

If it is equal to 1, it is unitary elastic.

If it is less than 1, it is said to be inelastic.

As there is a 0.6 percent change in quantity demanded with a 23.8 percent increase in revenue, so the price elasticity of demand is less than 1 and thus the demand is relatively inelastic.

Price Elasticity of Demand = Percentage change in Quantity demanded / Percentage change in Price

0.6 / 23.8 = 0.025

Thus the usage of toll roads is relatively inelatic as the percentage change in quantity demanded is much less than the percentage change in revenue.

The 6-month quantitative information can be used for :

Calculating the change in usage of toll road

Change in Revenue collected.

Putting both together, gives the elasticity of demand.