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# Elasticity of demand for gasoline and public transport

1. A. Current gas is \$1.50 a gallon, avg household income is \$100,000 a yr. The quantity demanded is 200 million gallons of gas a week. If gas were to increase to \$1.68 a gallon the quantity demanded would fall to 158.7 million gallons a week. If household income increased to \$110,500 a yr , the quantity demanded would rise to 208 million gallons a week. Find the income elasticity of demand. Explain whether gas is a normal or inferior product.

B. In 2003 the NY MTA increased subway fares 33%. Ridership before fare change was 1million. Ridership fell 1% (from 1million to 991,000), but discount ridership increased from 25% to 32%. Assume the avg discount far was increased by 10%.(250,000 to 317,120) Without the discount increase, discount ridership would have went up from 250,000 to 350,000. Assume the cross-price elasticity of demand for discount rides with respect to regular fares be X. Isolate the change is discount ridership due to the change in regular fares as part of your calculation of X.

#### Solution Preview

1. A. Current gas is \$1.50 a gallon, avg household income is \$100,000 a yr. The quantity demanded is 200 million gallons of gas a week. If gas were to increase to \$1.68 a gallon the quantity demanded would fall to 158.7 million galons a week. If household income increased to \$110,500 a yr , the quantity demanded would rise to 208 million gallons a week. Find the income elasticity of demand. Explain whether gas is a normal or inferior product.

change in income 10,500/100,000 = 10.5 percent
Change in demand: 8/200 = 4 ...

#### Solution Summary

How elasticity of demand affects subway ridership; income elasticity of demand for gasoline

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