Answer to Question #147447 in Microeconomics for aisha

Question

A news website reported (Feb. 17, 2020) that ridership of Karachi Metro Bus declined after a fare increase: “There were nearly four million fewer riders in December 2019, the first full month after the price of a token increased Rs. 25 to Rs.150, than in the previous December, a 4.3 percent decline.” i. Use these data to estimate the price elasticity of demand for Karachi Metro Bus. (2 Marks) ii. According to your estimate, what happens to the Karachi Metro Bus’s revenue when the fare rises? (0.5 Marks) iii. Why might your estimate of the elasticity be unreliable?

Answer 1

$$Solution$$

a)$Price elasticity\ of\ Demand\ =\frac{{0.172}\div{3.828}}{{125}\div{25}}\times100\%=0.9$ for Karachi Metro bus.

b) When the bus fare rises the Karachi revenue is not affected, but even rather increases because though the riders reduced there was an equivalent increase in fare from Rs25 to Rs125.Because the demand is inelastic, the Metro Bus revenue rises when the fare rises.

c)The elasticity estimate might be unreliable because it is only the first month after the fare increase. As time goes by, people may switch to other means of transportation in response to the price increase. So the elasticity may be larger in the long run than it is in the short run.