MULTIPLE-CHOICE QUESTIONS 1. If the price elasticity of demand is 0.5, which of the following will a 20% price hike lead to? (a) 5% drop in quantity demanded (b) 10% drop in quantity demanded (c) 20% drop in quantity demanded (d) 40% drop in quantity demanded A city is considering a fare hike for its bus service. At the current fare of $2.00, daily ridership is 24,000 people. The city estimates that if it raises fare to $2.50, ridership will decline to 21,000. 2. Using mid point method of calculating elasticity, which of the following is the price elasticity of demand? (a) 0.0 (b) 0.6 (c) 1.0 (d) 6.0 3. Which of the following is recommended if the city wants to raise more revenue from its buss system? (a) Raise the price to $2.50 (b) Keep the price at $2.00 and wait for demand to increase (c) First lower the price to attract riders, then gradually increase price (d) First raise price to get revenues, then lower price after the buses are paid off