Question 1 A 20% increase in automobile costs has been observed to cause a 5% increase in transit patronage relative to the patronage prior to the increase and a 10% decrease in auto usage. Calculate the implied direct and cross elasticities of demand as measured by Esh Earcand Hog-are Solutions For direct elasticity: V. = 0.9V., P, = 1.2P. Eshr = (V1-V.)/V -0.1 = -0.5 (P, -P.) IP. ( V , - V . ) ( P, + P. ) / 2 Earc -0.579 ( P, - Po ) ( V , + V . ) / 2 In InV -InV. Elog-are InP -InP. -0.57788 Po For cross elasticity: Q1 =1.050., P, =1.2P. Eshr (21 -20)/ 2 0.05 0.25 (P, - Po) I Po 0.2 (Q - Qo) (P, + Po ) / 2 Earc = 0.2683 ( P, - P.) ( Q1 + Q.) /2 In 91 InQ -InQ Elog-are Qo = 0.2676 InP -InP. In- Po