You are Brandon Johnson. The city needs money. You are contemplating 2 sources of revenue: levying a tax on gas in Chicago at $.50/ gal, and/or increasing the CTA fare $.25. The 2 demand schedules are as follows. Gas price Gallons demanded (in millions) CTA fare Number of riders (one way) (in millions) $4.50 1 $2.00 6 4.00 1.1 1.75 8 3.50 1.2 1.50 10 3.00 1.3 Answer the following questions Are the 2 demand curves straight lines? Is the elasticity constant on each curve at each price? If so, what is it? If not, what is it? Use mid point method. ( 5 Elasticities) +16 pts Assume the starting point is $4.00 gas and $1.75 CTA. Is one strategy better than the other, just from an incremental total revenue perspective, that is for both Johnson and the CTA? Does this result make sense with your understanding of elasticity and total revenue? Why or why not? +9 pts Your answers should be complete enough to answer each question.
You are Brandon Johnson. The city needs money. You are contemplating 2 sources of revenue: levying a tax on gas in Chicago at $.50/ gal, and/or increasing the CTA fare $.25. The 2
Gas
(one way) (in millions)
$4.50 1 $2.00 6
4.00 1.1 1.75 8
3.50 1.2 1.50 10
3.00 1.3
Answer the following questions
- Are the 2 demand curves straight lines? Is the elasticity constant on each curve at each price? If so, what is it? If not, what is it? Use mid point method. ( 5 Elasticities) +16 pts
- Assume the starting point is $4.00 gas and $1.75 CTA. Is one strategy better than the other, just from an incremental total revenue perspective, that is for both Johnson and the CTA? Does this result make sense with your understanding of elasticity and total revenue? Why or why not? +9 pts
Your answers should be complete enough to answer each question.
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