S.
Klepper, Economics
73-100, Fall 2009
If
the city increased the bus fare, the quantity demanded of bus rides would
decline and the number of riders would be expected to decline. Total revenues would rise, however, if the
price elasticity of demand for bus service were less than one, in which case
the city’s losses would decline.
Alternatively, if the price elasticity of demand for bus service were
greater than one, the city’s revenues would decline and its losses would
increase if it raised the bus fare. The
opposite applies to a decrease in the bus fare—it would decrease revenues and
increase losses if the price elasticity of demand were less than one and
increase revenues and decrease losses if the price elasticity of demand were greater
than one. In the intermediate case of a
price elasticity of demand for bus service equal to one, a price increase or
decrease would have no effect on total revenues and hence would have no effect
on the city’s losses. The income elasticity of demand indicates nothing about
the effect of a price change on the quantity demanded or total revenues.
Based
on this description, the answers to the individual questions are:
_____1. False
_____2. False—it depends on the price elasticity of demand
_____3. False
_____4. True
_____5. False