In Atlanta, the price elasticity of demand for bus rides is -0.5, the income ela
ID: 1190932 • Letter: I
Question
In Atlanta, the price elasticity of demand for bus rides is -0.5, the income elasticity of demand for bus rides is -0.1 and the cross price elasticity of demand for bus rides with respect to gasoline is 0.2.
Is the demand for bus rides elastic or inelastic with respect to the price of a bus ride? Why?
Would an increase in bus fares increase the bus company’s total revenues? Explain your answer.
Describe the relationship between bus rides and gasoline. Explain
If the price of gasoline increases by 10% with no change in the price of a bus ride, how will the number of bus rides change?
If incomes in Atlanta increase by 5% with no change in the price of a bus ride, how will the number of bus rides change? Is a bus ride a normal or inferior good? Why?
Explanation / Answer
The demand for bus rides is relatively inelastic. The price elasticity of demand is -0.5, which is less than 1. We know that, elasticity less than 1 implies inelastic demand, which is quite possible in the short run. Bus being a public transport will cost lesser than using a private/own transport, so it is cheaper to travel by bus than any other transport making the demand inelastic in short run.
Yes, increase in bus fares would increase the company's total revenue. The elasticity being less than 1 implies that percentage change in quantity demanded would be LESS than percentage change in price, that is, with a price increase, the quantity demanded would not fall much ! Hence increasing the revenue.
The relationship between bus rides and gasoline are substitutes. The cross price elasticity between the two is +0.2. A positive relation clearly shows that the two goods are substitutes (negetive relation implies complementarity), which is reasonable to accept. When the price of gasoline goes up, it becomes more expensive to travel through own/private transpost, hence consumer would want to substitute to some inexpensive transport,that is, the bus rides. And vice-versa would occur when price of gasoline goes down.
If the price of gasoline increases by 10% and no change in the price of bus, also bus and gasoline being sunstitutes, would lead to increase in the number of bus rides. As now, its cheaper to travel through public transport like bus.
If the income of Atlanta increases, with no change in the price of bus rides, the number of bus rides would tend to fall. Because the income elasticity is -0.1, the negetive sign along with the elasticity of less than 0 implies that the bus rides are inferior commodities. The valid argument supporting is that as the income of the consumer increases, he/she will prefer using his/her own/private transport than the public one. Here private transport will be considered as a superior good.