The local public transportation system recently raised rates and was surprised to be faced with declining revenue. What can be accurately concluded?
A)The cross-price elasticity of demand for public transportation is less than 1.
B)The demand for public transportation is inelastic.
C)The income elasticity of demand for public transportation is greater than 1.
D)The demand for public transportation is elastic.
E)The demand curve for public transportation has a positive slope.

Question

Quizplus · Accepted Answer

The fact that raising rates led to a decline in revenue suggests that the demand for public transportation is elastic, meaning that consumers are sensitive to changes in price. If the demand were inelastic or if the cross-price elasticity of demand were less than 1, we would expect an increase in price to lead to a corresponding increase in revenue. The income elasticity of demand is not relevant in this case since there is no information about changes in income. The slope of the demand curve cannot be determined from this information alone.

The Local Public Transportation System Recently Raised Rates and Was