Problems and Applications Q8 Suppose subway ridership in New York City rose by 8 percent after a fare decrease of 25 cents to $2.50. Using the midpoint method, an estimate of the price elasticity of demand for subway rides is . True or False: According to your estimate, the Transit Authority's revenue rises when the fare decreases. True False

-0.85

False.

Explanation: Price Elasticity of Demand =

Percentage change in price =

Average Price =

Old Price = 0.25 + New Price (2.5)  = 2.75

Average Price =

=

=2.625

Percentage change in price =

=

=

=-0.094

Price Elasticity of Demand =

Price Elasticity of Demand= 8%/0.094 =

=-0.85

B. False, the Transit Authority's revenue rises when the fare increases. The price elasticity of demand for subway rides is less than 1, meaning that demand is price inelastic and a change in price creates a smaller change in quantity demanded. If fares decrease, revenue decreases. If fares increase, revenue increases. Prices should be raised to increase revenue.

propioception;

answer; approx,300,000 ;