Use the following information to answer question 3 to 5 In P

Use the following information to answer question 3 to 5. 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-price elasticity of demand for bus rides with respect to gasoline price (for household consumption) is 0.2.

Describe the relationship between bus rides and gasoline, according to the given information. Are bus rides and gasoline substitutes or complements? Why?

If the price of gasoline increases by 10 percent with no change in the price of a bus ride, how will the number of bus rides change and how much is the percent change in quantity demand of bus rides?

If incomes increase by 5 percent with no change in prices, how will the number of bus rides change? Calculate the percent change in quantity demanded for bus ride.

Is a bus ride a normal good or an inferior good? Why?

Solution

[00:30, 1/29/2018] Samyak: A. Since cross price elasticity is positive, they are substitutes.

B. Bus rides will increase. There will be a 2 percentage increase in demand for Bus rides.

C. Bus rides will increase. Demand for bus rides will increase by 0.5 percent.

D. As increase in income leads to an increase in Bus rides. Hence its a normal good.