Question

In 2017, the Metropolitan Transportation Authority (MTA) in New York City raised the price of a monthly subway pass from $116.50 to $121.00. According to an article in the New York Times, “Officials at the authority have said they must raise fares every two years to pay for the rising costs of providing service.” a. In order for the MTA’s strategy for covering its rising costs to be successful, what must be true about the price elasticity of demand for subway passes? b. Suppose that the MTA’s strategy in (a) doesn’t succeed. What then must be true about the price elasticity of demand for subway passes? On the same graph, draw a demand curve for subway passes assuming that the MTA’s strategy succeeds and a second demand curve assuming that the strategy fails. For each demand curve, your graph should indicate the areas representing the revenue the MTA receives following the price increase.

1. Suppose that the MTA’s strategy in (a) doesn’t succeed. What then must be true about the price elasticity of demand for subway passes? On the same graph, draw a demand curve for subway passes assuming that the MTA’s strategy succeeds and a second demand curve assuming that the strategy fails. For each demand curve, your graph should indicate the areas representing the revenue the MTA receives following the price increase.

Answer 1

In 2017, the Metropolitan Transportation Authority (MTA) in New York City raised the price of a monthly subway pass from $116.50 to $121.00. According to an article in the New York Times, “Officials at the authority have said they must raise fares every two years to pay for the rising costs of providing service.” a. In order for the MTA’s strategy for covering its rising costs to be successful, what must be true about the price elasticity of demand for subway passes?

Revenue = Price *Quantity = P*Q.

When prices are increased and revenue still increases then it means that the demand is inelastic and people are not going for options. This also means that with increasing costs, Metropolitan Transportation Authority (MTA) in New York City can raise the price of a monthly subway pass. As shown below, in fig. a Price increase is very high from P 1 to P2, but quantity decreased is very small from Q1 to Q2. Hence total revenue will increase and MTA would not worry about rising costs.

b. Suppose that the MTA’s strategy in (a) doesn’t succeed. What then must be true about the price elasticity of demand for subway passes?

When prices are increased and revenue decreases then it means that the demand is elastic and people are going for options or decreasing the number of travels through subway pass. This also means that with increasing costs, Metropolitan Transportation Authority (MTA) in New York City cannot raise the price of a monthly subway pass. As shown below, in fig.b. Price increase is very small from P 1 to P2, but quantity decreased is very large from Q1 to Q2 . Hence total revenue will decrease and MTA would worry about rising costs.