Elasticity: The New York Times reported (Feb. 17, 1996) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3% decline.”
a. Use these data to infer the original subway token price and calculate the price elasticity of demand for subway rides. Interpret your calculated result, i.e., specify whether the value you calculate indicates demand is elastic, inelastic, etc…
b. According to your elasticity estimate, what happens to the transit authority’s revenue when the fare rises?
c. How might factors that influence the elasticity of demand make your estimate of the elasticity be unreliable? Give the factor or factors you use and provide concise support for your choice(s) in one sentence.