New York Times reported that subway ridership declined by five (5) million fewer riders in December, 1995, the first full month after the price of the token increases by + $.75 to $2.00 (+ 60%)than in the previous December. This resulted in a 15 % decline in riders.

> With this information, estimate the Price elasticity of Demand (PED) for subway rides;

> According to your analysis, what happens to the Transit Authority's total revenue when the fare rises? Explain ?

>Why might your initial elasticity (PED) calculation be unreliable?

> If your explicit total cost is $50 M (Accounting costs) and $60 M Economic costs, based on the token increase, are you now generating enough revenue to cover your operating costs? What is the profit / loss turn-around ? Interpret your profit (loss) results.

> The difference between Accounting costs (explicit) and Economic costs is the inclusion of your Opportunity cost ($ 10 M).

Accounting costs = Fixed plus Variable costs =$ 50 M

Economic costs = Accounting costs + Opportunity costs; $ 50 M + $ 10 M = $ 60 M.

* Hint: Formulas to use are TR - TC = Profit;

* Accounting Profit (Loss): TR - Accounting TC = Profit (Loss)

* Economic Profit (Loss): TR - Economic TC = Profit (Loss)

* Price Elasticity of Demand is = % Change in Quantity Demanded / % Change in Price....the absolute value. ( 15 %/ 60 %)

* TR = Total Revenue (P * Q); Total Cost (Accounting) = Fixed + Variable = $50 M; Total Cost (Economic) = Fixed + Variable + Opportunity Cost = $ 60 M.

* Ridership PRIOR the token increase ($ 1.25) = 5 M / 15 % ; Ridership AFTER the token increase ($ 1.25) = 5 M /15%- 5 M = ??

* Ridership change: 33.3 M @ $1.25 token versus 28.3 M @ $2.00 token; That is 5 M less riders due to the token increase from $1.25 to $2.00.