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You are the manager of the public transit system. You are informed that the system faces a deficit, but you cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing fares. You are advised that the estimated price elasticity of demand for the first few months after a price change is about −0.3. Select the statement that best describes the results of raising the fare in the short run.

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Answer:

total revenue rises immediately after the fare increases, since demand over the immediate period is price inelastic.

Explanation:

Price elasticity is the degree of responsiveness of the quantity demanded to change in price. When price is elastic an increase in price will result in a decrease in the quantity demanded.

In this instance the elasticity is predicted to be -0.3. This is less than one and is inelastic meaning the quantity demanded will be less responsive to price changes.

So an increase in price will not affect the quantity demanded much, till elasticity gets to -1 them the quantity will drop.

In the short run there will be increased revenue.

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