The new york times reported 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."

Question

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?

Answer 1

Thake a shot, what do you think?

hint: elasiticty is (%change in Q)/(%change in P). And %change in P = .25/1.25 = 20% (Note: you could use the alternative mid-point method. It would slightly change the answer, but not affect the analysis)

Answer 2

-.215

Answer 3

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Answer 4

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