Question

When tolls on the Dulles Airport Greenway were reduced from $1.75 to $1.00, traffic increased from 10,000 to 26,000 trips a day. Assuming all changes in quantity were due to the change in price, what is the price elasticity of demand for the Dulles Airport Greenway?

Answer 1

Answer:

Price elasticity of demand, $P_{ED}$ = 1.63

Explanation:

We know,

Price elasticity of demand, $P_{ED}$ = $\frac{Percentage change in Quantity Demanded}{Percentage change in prices}$

We will be using mid-point method to calculate the price elasticity.

Here,

Percentage change in Quantity demanded = $\frac{Q_{1} - Q_{0}}{\frac{Q_{1} + Q_{0}}{2}}$ × 100

or, Percentage change in Quantity demanded = $\frac{26,000 - 10,000}{\frac{26,000 + 10,000}{2}}$ × 100

Therefore, % change in Quantity demanded = $\frac{16,000}{18,000}$ × 100 = 88.89%

Again,

Percentage change in price = $\frac{P_{1} - P_{0}}{\frac{P_{1} + P_{0}}{2}}$ × 100

or, Percentage change in price = $\frac{1.00 - 1.75}{\frac{1.00 + 1.75}{2}}$ × 100

Therefore, Percentage change in price = $\frac{-0.75}{1.375}$ × 100 = - 54.55%

Therefore, Price elasticity of demand, $P_{ED}$ = 88.89% ÷ (- 54.55%) = 1.63

We know, price elasticity is always positive. Therefore, we have to give an absolute value for price elasticity.