The number of taxicabs in Motorville and the taxicab fares are regulated. The fare currently charged is 5 a ride.
Motorville taxicab drivers want to obtain government's permission to raise the fare to increase their revenues and ask you to be their economic adviser. After studying the market, you come up with the following demand schedule for taxicab rides: a) Calculate the price elasticity of demand for taxicab rides as the fare rises from 5 to 6. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare rise? b) What happens to the taxicab drivers' total revenue if the fare rises from 5 to 6? How can you use your answers in part a to answer this question? Should the drivers try to obtain permission to raise the fare? c) Calculate the price elasticity of demand for taxicab rides as the fare falls from 5 to 4. (Use the midpoint method in your calculations.) Is the demand price elastic or inelastic for this fare decrease? d) What happens to the taxicab drivers' total revenue if the fare falls from 5 to 4? How can you use your answers in part c to answer this question? Should the drivers try to obtain permission to lower the fare? e) What fare will maximize the taxicab drivers' total revenue? Explain.
Question 2
If the price of a good increases, a consumer will substitute away from the relatively more expensive good, which will increase the marginal utility for that good and bring the consumer back to equilibrium.
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