Answer to Question #220561 in Microeconomics for Nitin

Question

Suppose on 30 September 2003, the Indian National Railways (INR) unilaterally lowered the AC I class passenger fare of the Mumbai-Delhi Rajdhani Express!

Fare (per 100 KM)    Average Daily Sale (Rs.

Pre- 09-03  Post-09-03  Pre-09-03 Post-09-03

INR 45      30             376836         448962

AIR 90       90           1037375       1207326

Assuming travel by AIR as the only alternative for high-income groups, do you think that a computation of the own-price elasticity of demand for Mumbai-Delhi travel by Rajdhani Express as in the earlier case will yield the correct measure?

Answer 1

I think the computation of own price elasticity of demand for Mumbai- Delhi Rajdhani Express will not yield the correct measure.

This is because the demand for travel by train will remain the same for the other income groups. High income groups won't join them because they only have an alternative of travelling by air. There won't be any change in demand.