A Metro Fare Increase and an Economic Boom Affect the Taxi Business

Supports Learning Objective 5.4:Define the cross-price elasticity of demand and the income elasticity of demand, and understand their determinants and how they are calculated.

Assume that two separate events affect the market for taxi rides in Dubai:

1.There is a 20 percent increase in Dubai Metro fares.As a result, taxi cab rides increase 5 percent.

2.An economic expansion causes a 5 percent increase in the incomes of tourists visiting Dubai. Taxi cab rides increase 2 percent.

Discuss the cross-price and income elasticity formulas and use these formulas to determine the values of these elasticities for taxi cab rides.

A.State the cross-price elasticity formula and determine the value of this elasticity for taxi cab rides.

B.State the income elasticity formula and determine the value of this elasticity for taxi rides.