Recent orders
Two drivers—Tom and Jerry—each drive up to a gas station
Two drivers—Tom and Jerry—each drive up to a gas station. Before looking at the price, each places an order. Tom says, “I’d like 10 gallons of gas.” Jerry says, “I’d like $10 worth of gas.” What is each driver’s price elasticity of demand?
Economists have observed that spending on restaurant meals
Economists have observed that spending on restaurant meals declines more during economic downturns than does spending on food to be eaten at home. How might the concept of elasticity help to explain this phenomenon?
The New York Times reported
The New York Times reported (Feb. 17, 1996, p. 25) that subway ridership declined after a fare increase: “There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.”
a. Use these data to estimate the price elasticity of demand for subway rides.
b. According to your estimate, what happens to the Transit Authority’s revenue when the fare rises?
c. Why might your estimate of the elasticity be unreliable?