S. Klepper, Economics 73-100, Fall 2011
service in many municipalities, including
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. To simplify, assume that the cost of the bus is the only cost of operating bus service and that this cost would not change if more or less people rode the buses.
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 decrease 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 increasing the bus fare.