Question

At a total cost of $20, the number of trips is 190,000. if you use an estimate of the elasticity equal to 2, how many trips will people take when the fee is $16? (hint: take the percent change in price and multiply it by the elasticity of 2. this is the percent change in quantity. apply this to the 190,000 quantity at a $20 total cost. finally, subtract off this change from the 190,000 quantity.)

Answer 1

An elasticity of 2 means that a 1% increase in price will cause a 2% decrease in demand.
 Change in price in % = (20 - 16) / 20 * 100 = 4/20 * 100 = 20%. So there's a 20% decrease in price (from $20 to $16)
 A 20% decrease in price will result in a 40% increase in demand since elasticity equals 2.
 So 40/ 100 * 190, 000 = 76, 000
 Hence since there's an increase in demand the people will make 190, 000 + 76, 000 = 266, 000