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 1.2. 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 $1.20.

Question

Quizplus · Accepted Answer

Based on the given information, the elasticity of demand for bus trips is 1.2, which means that a 1% increase in fares will result in a 1.2% decrease in quantity demanded. Therefore, to increase revenue, the transit authority should lower the fare, as the increase in quantity demanded resulting from a lower fare will offset the decrease in revenue from the lower fare. A lower fare will also attract more customers, thus increasing revenue further. Therefore, lowering the fare from $1 to slightly below $1 would result in an increase in revenue for the transit authority. Option C is the only choice that follows this logic.

A Local Transit Authority Charges $1 for a Bus Ride