Question

In Pioneer Ville, the price elasticity of demand for bus rides is 0.8, the income elasticity of bus rides is -1.2 and cross price elasticity of demand for bus rides with respect to gasoline is 1.1. a) Is the demand for bus rides elastic or inelastic? Why? b) Would an increase in the price of bus rides increase the bus companys total revenue? Explain your answer. c) If incomes increase by 5 percent with no change in prices, how will the number of bus rides change? Is a bus ride a normal good or an inferior good? Why? d) Describe the relationship between bus rides and gasoline. If the price of gasoline increases by 10 percent with no change in the price of a bus ride, how will the number of bus rides change? Are bus rides and gasoline complements or substitutes? Explain

Answer 1

ANSWER

(a) The demand for a bus ride is inelastic as the Elasticity of demand is less than 1.

(b) Yes, the increase in prices of the bus rides will increase the company's total revenue if the quantity demanded remains constant. However, an increase in price will lead to a decrease in quantity demanded, which can reduce the revenue also.

(c) If income increases by 5% keeping the prices constant then the quantity demanded will fall. As the income elasticity of the bus ride is negative, it is an inferior good.

(d) If the price of gasoline increases with no change in the price of bus rides then the demand for bus rides will increase as cross-price elasticity with respect to gasoline is 1.1. Bot the goods are substitute goods as the price increase of one good makes other good more attractive.

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