S. Klepper, Economics 73-100, Fall 2009

Quiz 3

Bus service in many municipalities, including Pittsburgh, is a losing proposition. The buses are only partially filled and the cost of the bus service exceeds the revenues the city of Pittsburgh earns from providing the bus service.

The city is considering various proposals to reduce the losses from the bus service. Most of the cost of bus service is the cost of the buses themselves, which would not change at all if more or less people rode the buses. Assume the cost of the buses is the only cost of operating the bus service.

Which of the following statements concerning this situation are correct? Mark true for a correct answer and false for an incorrect one and provide explanations for each of your answers.

_____1. If the city increased the bus fare, it would increase the number of bus riders.

_____2. If the city increased the bus fare, it would reduce its losses on bus service.

_____3. If the income elasticity of demand for bus service were less than one, the city would reduce it losses by increasing the bus fare.

_____4. If the price elasticity of demand for bus service equaled one, the city’s losses would not be affected by a change in the bus fare.

_____5. If the price elasticity of demand for bus service were less than one, the city would reduce its losses by lowering the bus fare.