You are an economist for the City Subway Commission. Presently, the price of a subway ride is 80¢, and 200,000 seats are filled weekly. The price elasticity of demand for subway rides is -0.40, and the income elasticity of demand is -0.60.
(i) The Commission wants to ensure that the subway has enough excess capacity to handle any extra demand that might occur during an economic decline. If a recession lowered area incomes by 5%, how many additional seats per week would the subway need?
(ii) The Commission has just approved a subway price increase of 10¢ per ride. The Commission wants to know if it can use the opportunity to retire two aging subway cars that each provide 8,000 seats weekly. When the price hike goes into effect, can neither, one, or both cars be retired?
(i) Income falls by 5%, so the quantity demanded rises by 0.60 ? 5% or 3%. The number of seats required rises by 3% ? 200,000 or 6,000 seats.
(ii) The price increase is 12.5%, so quantity demanded falls by 0.40 ? 12.5% or 5%. The number of seats demanded falls by 5% ? 200,000 or 10,000 seats. The two aging cars provide 16,000 seats, so only one car can be retired when the price increases.
You might also like to view...
In the short run following a depreciation of the dollar, the United States may move downward along the J-curve since it is likely that the United States
A) spends more dollars on imports. B) spends fewer dollars on imports. C) sells an increased dollar amount of exports. D) sells a reduced dollar amount of exports.
Consider a market characterized by two firms that set the same price in the market, P = $10. Total market demand is QT = 100 ? 2P, of which the two firms share equally. Based on this information, we can conclude:
A. the HHI = 2,500 and the Rothschild index is 2. B. the HHI = 5,000 and the Rothschild index is 1. C. the HHI = 5,000 and the Rothschild index is 2. D. None of the answers are correct.
Because monetarists believe that output is sensitive to changes in the money supply, they recommend that the money supply be allowed to grow at a steady and predictable rate.
Answer the following statement true (T) or false (F)
A tariff is
A. a tax on imports. B. a limit on the quantity of a good that can be imported into a country. C. a government payment made to domestic firms to encourage exports. D. a payment made by the government to producers of the product.