Skyscraper city has a subway system for which a one-way fare is $1.50. There is pressure on the mayor to reduce the fair by 1/3 to 1 dollar the mayors dismayed, thinking that this woman skyscrapers is losing 1/3 of its revenue from sales of subway tickets the mayors economic advisor reminds her that she is focusing on the price effect and ignoring the quantity effect. Well, the fair decline will negatively affect revenue through the blank effect. It will positively affect city revenue through the blank Effect.
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Step 1
The mayor is concerned that reducing the fare from $1.50 to $1.00 will lead to a decrease in revenue because the price per ticket is lower. This is known as the price effect, which suggests that lower prices can lead to lower total revenue if the quantity sold Show more…
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Skyscraper City has a subway system, for which a oneway fare is $\$ 1.50 .$ There is pressure on the mayor to reduce the fare by one-third, to $\$ 1.00 .$ The mayor is dismayed, thinking that this will mean Skyscraper City is losing one-third of its revenue from sales of subway tickets. The mayor's economic adviser reminds her that she is focusing only on the price effect and ignoring the quantity effect. Explain why the mayor's estimate of a one-third loss of revenue is likely to be an overestimate. Illustrate with a diagram.
The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50 than in the previous December, a 4.3 percent decline.” Use these data to estimate the price elasticity of demand for subway rides. According to your estimate, what happens to the Transit Authority’s revenue when the fare rises? Why might your estimate of the elasticity be unreliable?
Andrew D.
The New York Times reported (Feb. 17,1996 ) that subway ridership declined after a fare increase: "There were nearly four million fewer riders in December 1995 , the first full month after the price of a token increased 25 cents to $\$ 1.50,$ than in the previous December, a 4.3 percent decline." a. Use these data to estimate the price elasticity of demand for subway rides. b. According to your estimate, what happens to the Transit Authority's revenue when the fare rises? c. Why might your estimate of the elasticity be unreliable?
Jennifer S.
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