Question

The local community bus service, which is a monopoly, charges $2.00 for a one-way fare. The city council is thinking of raising the fare to $2.50 but expects it to generate less than 25% more revenue. The council has asked for your advice as a student of economics. The council predicts that raising the price by 25% will raise revenues by less than 25%. Which of the following is true? Choose one:
A. The council hasn't taken into account either the output effect or the price effect.
B. The council has taken into account the price effect but not the output effect.
C. The council has taken into account both the price effect and the output effect.
D. The council has taken into account the output effect but not the price effect. Part 2 (1 point) Therefore, the council has increase in revenue.

Answer 1

The council has taken into account the price effect but not the output effect.

Answer: Option B.

Explanation:

The effect that an adjustment in esteem has on the buyer interest for an item or administration in the market is known as the price effect. The value impact can likewise allude to the effect that an occasion has on something's cost. The value impact comprises of the substitution impact and the salary impact.

The circumstance where an expansion in the cost of one info will expand a company's creation costs and lessen its degree of yield, this diminishing the interest for different sources of info; on the other hand at an abatement in the cost of the information is known as the output effect.