Suppose subway ridership in New York City declined by 10 percent after a fare increase of 25 cents to $2.75. 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 increases. True False

Elasticity is 1.05

False

Explanation:

The Price Elasticity of Demand which measures how demand for goods change in relation to a change in price is calculated by the following formula,

Elasticity of demand = % change in Quantity ÷ % change in Prices

The Midpoint method is a method of estimating price percentage change by dividing the change in price by the AVERAGE of the new price and the old price.

The average of the changes are,

= (2.75 + (2.75 - 0.25))/2

= (2.75 + 2.5)/2

= 2.625

The Midpoint method gives a chance in price of,

= (2.75 - 2.65 )/ 2.625

= 9.5%

The Elasticity is therefore,

= Elasticity of demand = % change in Quantity ÷ % change in Prices

= 10% / 9.5%

= 1.05

According to this, the Transit Authority's revenue will not rise when Fair increases because the Elasticity is quite close to 1. An elasticity of 1 means that when fares increase, people using trains decrease by almost the same amount so revenue remains the same.

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