In a City with a Medium-Sized Population, the Equilibrium Price

question 27

Essay

In a city with a medium-sized population, the equilibrium price for a city bus ticket is $1.00, and the number of riders each day is 10,800. The short-run price elasticity of demand is -0.60, and the short-run elasticity of supply is 1.0.
a. Estimate the short run linear supply and demand curves for bus tickets.
b. If the demand for bus tickets increased by 10% because of a rise in the world price of oil, what would be the new equilibrium price of bus tickets?
c. If the city council refused to let the bus company raise the price of bus tickets after the demand for tickets increases (see (b) above), what daily shortage of tickets would be created?
d. Would the bus company have an incentive to increase the supply in the long run given the city council's decision in (c) above? Explain your answer.

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