Suppose that the MTA’s strategy doesn’t succeed. What then must be true about the price elasticity of demand for subway passes? Is demand price elastic or price inelastic?
A. Inelastic, because a price increase lowers revenue.
B. Elastic, because a price increase lowers the quantity demanded.
C. Elastic, because a price increase lowers revenue.
D. Inelastic, because a price increase lowers the quantity demanded.
The correct answer and explanation is:
The correct answer is C. Elastic, because a price increase lowers revenue.
Explanation:
Price elasticity of demand refers to how much the quantity demanded of a good changes in response to a price change. If demand is elastic, a small increase in price leads to a large decrease in the quantity demanded, which results in a decrease in total revenue. Conversely, if demand is inelastic, a price increase would cause a smaller decrease in quantity demanded, and total revenue would increase or remain stable.
In this case, if the MTA’s strategy does not succeed, it means that the price increase for subway passes leads to a reduction in total revenue. This implies that the quantity demanded is highly responsive to price changes, which is characteristic of elastic demand. When the demand for a good is elastic, a price increase causes a proportionally larger decrease in the quantity demanded, resulting in lower total revenue. This aligns with the idea that the MTA’s strategy fails because the price hike causes fewer people to buy subway passes, which lowers overall revenue.
In contrast, if demand were inelastic, the price increase would not lead to such a significant decrease in quantity demanded, and total revenue would either stay the same or increase. However, since the scenario suggests that the price hike lowers revenue, it indicates that demand is elastic. Therefore, the correct conclusion is that demand is elastic, and the price increase results in a decrease in total revenue.