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Elasticity vs. Inelasticity of Demand Assignment Discussion Paper

In a city that has buses, a subway system, ride-share services, and bicycle lanes, a taxi company is considering raising its rates. You are hired as an economist to analyze how this price increase could affect the company's total revenue and profits. What advice would you give? A. Do not raise rates right away. The price elasticity of demand will become inelastic over time. B. Keep rates the same. The price elasticity of demand is neither elastic nor inelastic. C. Do not raise rates and maybe even lower them. The price elasticity of demand is clastic. D. Raise rates. The price elasticity of demand is inelastic. EXPLAIN YOUR ANSWER EXTRA CREDIT: Be sure to review the assigned reading in VOTE before doing the questions below. Elasticity vs. Inelasticity of Demand Assignment Discussion Paper
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Step-by-step

Step 1/2

Determinants of elasticity of demand (ED)

1) The more the number of substitutes, the more responsive customers are to a change in price, so the more elastic demand is.

2) Demand is inelastic in the immediate to short run, but becomes elastic as time passes since consumers can find other available substitutes.

3) A good comprising a high share of consumer budget has more elastic demand, and

4) If the good is a necessity (e.g. heart medications), its demand is inelastic.

Explanation for step 1

Note: The more elastic (inelastic) demand is, the higher (lower) the absolute value of ED. Elasticity vs. Inelasticity of Demand Assignment Discussion Paper

Step 2/2

Analyzing the question

Since taxi services have many substitutes for transportation, its demand is elastic. With elastic demand, an increase (decrease) in price will decrease (increase) revenue, so a price hike is not recommended. Instead, a price reduction can increase revenue.

So, Options (A), (B) and (D) are incorrect.

Final answer

Therefore, the correct answer choice is Option (C).

Elasticity vs. Inelasticity of Demand Assignment Discussion Paper

Expert Answer

Elasticity vs. Inelasticity of Demand Assignment Discussion Paper In a city that has buses, a subway system, ride-share services, and bicycle lanes, a taxi company is considering raising its rates. You are hired as an economist to analyze how this price increase could affect the company's total revenue and profits. What advice would you give? A. Do not raise rates right away. The price elasticity of demand will become inelastic over time. B. Keep rates the same. The price elasticity of demand is neither elastic nor inelastic. C. Do not raise rates and maybe even lower them. The price elasticity of demand is clastic. D. Raise rates. The price elasticity of demand is inelastic. EXPLAIN YOUR ANSWER EXTRA CREDIT: Be sure to review the assigned reading in VOTE before doing the questions below. Elasticity vs. Inelasticity of Demand Assignment Discussion Paper

ORDER YOUR PAPER NOW

Step-by-step

Step 1/2

Determinants of elasticity of demand (ED)

1) The more the number of substitutes, the more responsive customers are to a change in price, so the more elastic demand is.

2) Demand is inelastic in the immediate to short run, but becomes elastic as time passes since consumers can find other available substitutes.

3) A good comprising a high share of consumer budget has more elastic demand, and

4) If the good is a necessity (e.g. heart medications), its demand is inelastic.

Explanation for step 1

Note: The more elastic (inelastic) demand is, the higher (lower) the absolute value of ED. Elasticity vs. Inelasticity of Demand Assignment Discussion Paper

Step 2/2

Analyzing the question

Since taxi services have many substitutes for transportation, its demand is elastic. With elastic demand, an increase (decrease) in price will decrease (increase) revenue, so a price hike is not recommended. Instead, a price reduction can increase revenue.

So, Options (A), (B) and (D) are incorrect.

Final answer

Therefore, the correct answer choice is Option (C).

Elasticity vs. Inelasticity of Demand Assignment Discussion Paper

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