Question

2. Given the following demand for a taxi

Qdt = 50 – 0.4 +0.5pb-0.25Y

Pt = 20, Pb = 30, Y = 52

Where;

Qdt = Quantity demanded of a taxi

Pt = transport fare for a taxi

Pb = Transport fare for a bus

i) Calculate the price elasticity of demand for a taxi (3marks)

ii) Calculate the cross elasticity of demand between the two modes of transport (5marks)

iii) Calculate the income elasticity of demand (5marks);

Answer 1

$$Q_{dt}=50-0.4p_t+0.5p_b-0.25Y$$

$$Q_{dt}=44$$

$$E_{dt}=-0.4\times \frac {20}{44}=-0.182$$

$$E_{tb}=-\frac {0.4}{0.5}$$

$$E_Y=-0.25\times \frac{52}{44}=-0.295$$