In Pioneer Ville the price elasticity of demand for bus ride

In Pioneer Ville, the price elasticity of demand for bus rides is 0.5, the income elasticity of demand for bus rides is -0.1, and the cross elasticity of demand for bus rides with respect to gasoline (personal consumption) is 0.2. 3. Is the demand for bus rides elastic or inelastic with respect to the price of a bus ride? Why? Would an increase in bus fares increase the bus company’s total revenue? Explain your answer.

Solution

Given that,

the price elasticity of demand for bus rides is 0.5,

the income elasticity of demand for bus rides is -0.1

the cross elasticity of demand for bus rides with respect to gasoline (personal consumption) is 0.2.

The demand for bus rides is inelastic with respect to the price of a bus ride as it is 0.5 which is less than one.The price elasticity of demand measures the responsivness of the quanity demanded to the percentage change in the price. An increase in bus fares will not lead to an increase in total revenues because the elasticity of demand is less than one. When demand is inelastic , an increase in price leads to a decrease in total revenues. This is because, a percentage decrease in price would not be able to increase demand to such an extent that it increases total revenue.