Suppose that VIA Rail asked government authorities for permission to increase its commuter rates by 20 percent.The railroad argues that declining revenues make this rate increase essential.Opponents of the rate increase contend that the railroad's revenues would fall because of the rate hike.It can be concluded that:
A)both groups feel that the demand is elastic but for different reasons
B)both groups feel that the demand is inelastic but for different reasons
C)both groups feel that demand is unit-elastic, but for different reasons
D)the railroad feels that the demand for passenger service is elastic and opponents of the rate increase feel it is inelastic
E)the railroad feels that the demand for passenger service is inelastic and opponents of the rate feel it is elastic

Question

Quizplus · Accepted Answer

The railroad's argument that declining revenues make the rate increase essential suggests that they see the demand as inelastic, meaning that they believe customers will continue to use their services even with a 20 percent rate increase. On the other hand, opponents of the rate increase argue that the rate hike would cause a decrease in revenue, indicating that they see the demand as elastic, and customers will switch to other forms of transportation if the rate increases too much. Therefore, the railroad feels that the demand is inelastic and the opponents feel it is elastic. Thus, option E is the best choice.

Suppose That VIA Rail Asked Government Authorities for Permission to Increase