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You are employed by the Chicago Transit Authority (CTA)
You are employed by the Chicago Transit Authority (CTA). Currently the CTA is experiencing a budget shortfall and is contemplating changing subway fares to increase its revenue. It is estimated that the price elasticity of demand for the subway at current fares is -1.7. To increase its revenue the MTA should lower the subway fare? Tureo or False?Why?
Expert Solution
Answer) True
Elasticity of demand=-1.7
Elasticity of demand is greater than 1 i.e the demand is elastic.
According to the total revenue approach of elasticity if there exist an inverse relationship between price and total revenue than elasticity is greater than 1 and if there exist a direct relationship between price and total revenue than Elasticity is less than 1.
In this case since the elasticity of demand is greater than 1 this means there exist an inverse relationship between price and total revenue.
To raise the total revenue the price must Decrease so to raise the total revenue CTA should reduce the Subway fare.
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