question archive You are the manager of the public transit system
You are the manager of the public transit system
Subject:EconomicsPrice:2.88 Bought3
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 for the first few months after a price change is about -0.3.
Select the statement that best describes the results of raising the fare in the short run.
a) Total revenue will rise incrementally as the demand fluctuates and price moves back and forth between being elastic and inelastic.
b) Total revenue falls, since demand changes and becomes price inelastic.
c) Total revenue rises immediately after the fare increase since demand over the immediate period is price inelastic.
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- The correct option is c). Total revenue rises immediately after the fare increase since demand over the immediate period is price inelastic.
Here, it is stated that the public transit system already facing a deficit, but it cannot cut its current spending. Therefore, the only way of reducing and removing this deficit is to raise the level of total revenue by raising the fares. Also, the price elasticity of demand for the first few months is 0.3; therefore, the most optimal way to raise the revenue immediately by raising the fares as the demand over the immediate period is inelastic.
