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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

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?

Subpart (a):

To determine
Estimating the price elasticity of demand.

Explanation

By midpoint method; the percentage change in price is calculated as follows:

Percentage change in price=PricePresentPricePreviousPricePresent+PricePrevious2=(1.501.25)((1.50+1.25)2)×100=0

Subpart (b):

To determine
Relevance of the price elasticity of demand.

Subpart (c):

To determine
Relevance of the price elasticity of demand.

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