1. The city government is losing millions of dollars on the system of mass transit (buses and subways). The government proposes to increase fares by 20% and it has asked your advice.

a)You know that the price elasticity of demand for mass transit in the city is approximately equal to -0.75. What do you think of the proposal to increase the fare to raise revenue for the city? Be as specific as possible.

b)The cross-price elasticity of demand between mass transit and taxis is 0.2.What does this tell you about taxis and mass transit?What effect will the mass transit price increase have on the demand for taxi rides?

c)The income elasticity of demand for mass transit is -0.05.What does this tell you about mass transit? Will this affect your recommendation about the price increase?