Question

In: Economics

You are now ready to play the part of the manager of the public transit system....

You are now ready to play the part of the manager of the public transit system. Your finance officer has just advised you that the system faces a deficit. Your board does not want you to cut service, which means that you cannot cut costs. Your only hope is to increase revenue. Would a fare increase boost revenue? You consult the economist on your staff who has researched studies on public transportation elasticities. She reports that the estimated price elasticity of demand for the first few months after a price change is about −0.3, but that after several years, it will be about −1.5. Explain why the estimated values for price elasticity of demand differ. Compute what will happen to ridership and revenue over the next few months if you decide to raise fares by 5%. Compute what will happen to ridership and revenue over the next few years if you decide to raise fares by 5%. What happens to total revenue now and after several years if you choose to raise fares?

Solutions

Expert Solution

Price elasticity of demand = % Change in Qty demanded / % Change in Price

Let us assume that at present Price is 100 and Qty. demanded is 100. So after 5% increase price will be 105. Now given that

in short term price elasticity is 0.3.

So, 0.3 = x/ 5
x = 0.3 * 5 = 1.5. Thus qty demanded is changed by 1.5 % in short term. So new qty will be 98.5.

Short term Revenue after price change = 105* 98.5 = 10342.5

in long term price elasticity is 1.5.

So, 1.5 = x/ 5
x = 1.5 * 5 = 7.5. Thus qty demanded is changed by 7.5 % in long term. So new qty will be 92.5.

Long term Revenue after price change = 105* 92.5 = 9712.5

Thus in short term revenue increases whereas in long term it will decrease.

This happens because in the short term some people stick to the old ways because they dont have an alternate so change in qty demanded is lesser as compared to change in price whereas in the long term people have time to find an alternate thus percentage change in qty demanded decreases as compared to price.


Related Solutions

Only  20% of the people in a certain city believe that its public transit system is adequate....
Only  20% of the people in a certain city believe that its public transit system is adequate. If  n  = 10 persons are selected at random, a. using binomial distribution to find the probability exactly 3 will think that the system is adequate. b. What is the probability that the fist person who  think that the system is adequate is the third person selected?
In an effort to increase production of an automobile part, the factory manager decides to play...
In an effort to increase production of an automobile part, the factory manager decides to play music in the manufacturing area. Eight workers are selected, and the number of items each produced for a specific day is recorded. After one week of music, the same workers are monitored again. The data are given in the table below. Can the manager conclude that the music has changed the production level? Worker Before After 1 6 8 2 8 11 3 10...
Now that you have worked through the rabbit Island case, you are ready to think of...
Now that you have worked through the rabbit Island case, you are ready to think of your own experiment to find out what microbe is causing a disease out break that could occur today. What data would you want to include? How would you control your variables?
In paragraph formation take on the role of a manager in a public health system, speaking...
In paragraph formation take on the role of a manager in a public health system, speaking to the public on the topic of ensuring high quality health care in a particular community. Identify a particular community with which you are familiar, and use the Web sites in the first unit to research the health care situation in that community. Create a post of approximately three paragraphs in which you: -Identify a health care issue in your chosen community. -Share the...
The manager of the Public Broadcasting System for Tennessee is considering changing from the traditional week...
The manager of the Public Broadcasting System for Tennessee is considering changing from the traditional week long contribution campaign to an intensive one day campaign. In an effort to better understand current donation patterns, she is studying past data. She is interested in investigating if male viewer’s donations have a significant different variability in amount from those of female viewers. To test this, random samples of 18 men and 16 women were selected from people who donated during last year’s...
11. Many proponents of public transit argue that the service should be provided free to the...
11. Many proponents of public transit argue that the service should be provided free to the public in metropolitan areas in order to reduce pollution and traffic congestion. Estimates by economists found the price elasticity of demand for public transit to be 0.17. The economists also found the cross-price elasticity of demand with the automobile to be 0.10. a. What will free public transit mean to the use of the public transportation service? b. What will free public transit mean...
The analytics department of a public transit service group is trying to forecast the future number...
The analytics department of a public transit service group is trying to forecast the future number of passengers using the University subway station during the Fall term. During the first 10 days of September, the team count the number of passengers entering and exiting the station between 8:00am to 10:00pm. Day   # Passengers 1   2250 2   2100 3   2150 4   2450 5   2250 6   2500 7   2300 8   2650 9   2350 10   2600 a)   Compute manually (show your formulas) the...
Now that you have completed you investigation of the Plague, you want to inform the public...
Now that you have completed you investigation of the Plague, you want to inform the public of the risk, vector, how to prevent the spread and how to protect families in your area. You need to design a means of disseminating the information you believe is most pertinent and responsible. Remember the year and what media of dissemination are available to you.
Now assume that you are the manager of a corporation and your firm is trying to...
Now assume that you are the manager of a corporation and your firm is trying to decide whether to lease a machine for five year sand pay the residual purchase costto buy the machine in the last year of the lease or buy the machine now.The annual lease payment would be $8,700 with payments made at the beginning of each year. The residual purchase cost would be $25,200 to be paid at the beginning of the fifth year. The lease...
Part A: Though it did not play a role in the video that you watched, the...
Part A: Though it did not play a role in the video that you watched, the oxidation state of the metal cation in a coordination complex can impact the difference in energy of the d orbitals. Consider aqueous solutions of two coordination complexes of chromium: [Cr(H2O)6]2+ is blue and [Cr(H2O)6]3+ is violet. Based on this observation, make a statement about the relationship between oxidation state and the difference in energy of the d orbitals (the d orbital splitting). Part B:...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT