A local transit authority charges $1 for a bus ride. An economics study suggests that in the price range from $0.50 to $1.50, the elasticity of demand for bus trips is 1.1. To increase its revenue, the transit authority should
A) leave the fare as it is.
B) raise the fare.
C) lower the fare.
D) charge $1.10.

Question

Quizplus · Accepted Answer

Based on the given elasticity of demand, the transit authority should lower the fare as the demand for bus trips is likely to increase (demand is elastic). This means that for every 1% decrease in price, the quantity demanded will increase by 1.1%. Therefore, a decrease in fare will result in increased revenue as the increased ridership will offset the lower fare. Of the options provided, only choice C (lower the fare) is consistent with this analysis.

A Local Transit Authority Charges $1 for a Bus Ride