Price

(dollars per ride)

Quantity demanded

(rides per month)

3

160

4

120

5

80

6

40

7

0

1) The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently charged is $5 a ride. Motorville taxicab drivers want to obtain government's permission to raise the fare to increase their revenues and ask you to be their economic adviser. After studying the market, you come up with the following demand schedule for taxicab rides:

a)Calculate the price elasticity of demand for taxicab rides as the fare rises from $5 to $6. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare rise?(10m)

b)What happens to the taxicab drivers' total revenue if the fare rises from $5 to $6? How can you use your answers in part a to answer this question? Should the drivers try to obtain permission to raise the fare?(10m)

c)Calculate the price elasticity of demand for taxicab rides as the fare falls from $5 to $4. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare decrease?(10m)

d)What happens to the taxicab drivers total revenue if the fare falls from $5 to $4? How can you use your answers in part c to answer this question? Should the drivers try to obtain permission to lower the fare?(10m)

e)What fare will maximize the taxicab drivers total revenue? Explain. (10m)

[Total= 50 marks]

Price

(dollars per ticket)

Quantity demanded business travelers

(tickets per week)

Quantity demanded leisure travelers

(tickets per week)

0

1,800

1,600

100

1,600

1,200

200

1,400

800

300

1,200

400

400

1,000

0

500

800

0

2) Suppose that business travelers and leisure travelers have the demand schedules for airline tickets from Atlanta to Philadelphia given in the table above.

a)Draw both demand curves.(10m)

b)As the price of tickets rises from $200 to $300, what is the price elasticity of business travelers' demand? What is the price elasticity of leisure travelers' demand? (Use the midpoint method in your calculations.) (15m)

c)Why do business travelers and leisure travelers have different price elasticities of demand for airline tickets?(15m)

d)At what price is the price elasticity of demand equal to 1 for business travelers? For leisure travelers? Explain.(10m)

[Total = 50 marks]