Question

4. (25 points) The following table provides data on price elasticities related to public transit. Suppose the current price of a ride on public transit is $1.00. Peak riders ride at rush hour, off-peak riders travel at other times. Elasticity El for Public Transit (Peak Riders) El for Public Transit (Off-Peak Riders) Cross-Price Elasticity of Demand for automobile trips with respect to public transit fare price Short Term 0.25 0.45 Long Term 0.50 0.90 0.25 0.07 a. Explain why the price elasticities of demand are lower for peak riders than for off-peak riders. b. in the short term, what is the percentage change in quantity demanded from a 20% decrease in the price of public transit on ridership among peak riders? C. Suppose the government wants to increase public transit ridership by 10% at peak times in the long term. What new price must be charged? What is the percentage change in automobile trips in the long term that results from this policy? Show your work.

Answer 1

A) Elasticity is lower for peak riders than off peak riders because peak riders are those riders who have inelastic demand for public transit and cannot postpone their travel due to change in prices of rides. Also, off peak riders have a highly elastic demand because they can always postpone their travels due to price rise.

This makes price elasticity of demand lower for peak riders

B)

SR price elasticity for peak riders = 0.25 = % change in demand / % change in price

This makes,

0.25 = % change in qd / 20

% change in quantity demanded = 5% rise

C)

Long run elasticity of demand at peak time = 0.5

In order to increase ridership by 10%, price must decrease by 10/0.5 = 20%

New price = 1(1+0.2) = $1.2

Change in automobile trips = 0.25 x 20 = 5%