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.

A. total revenue rises immediately, since demand will remain price inelastic.

B. total revenue will fluctuate as the demand fluctuates.

C.Total revenue falls, since demand changes and becomes price elastic.

Answer 1

Since it is given that years after the price change the price elasticity of demand will become -1.5.

it means the elasticity of demand is elastic in nature.

if there is even small change in the price then there will drastically fall in the quantity demanded and vice versa.