Question

You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand, several years after the price change, will be about −1.5. Select the statement that best describes the results of raising the fare in the long run.

Answer 1

Elasticity: Elasticity can be defined as the degree of responsiveness in supply or demand with respect to a change in price. Price Elasticity of demand can be defined as the relationship between the changes in quantity demanded to change in the price of a particular good. Given that a person is a manger of a public transit system. The system faces some deficit and there is no chance to cut the services which means that one cannot cut the costs. The only way of increasing revenue is by increasing fares. After the price change, the estimated price elasticity of demand is -1.5. As the price elasticity of demand is negative, the demand is inelastic. Therefore, the statement that best describes the results of raising the fare in the long run is that total revenue rises immediately since demand will remain price inelastic.