Short free-response question
Bus rides, income, and gas prices
- Unit 2
- 5 points
- About 12 minutes
You can use a calculator on this question, just like on exam day.
A shorter question with a few lettered parts on one situation, often built on a table, a payoff matrix or a given or described graph. You make claims, explain them, calculate a value, or describe a labeled graph and show a change on it. On the exam: Questions 2 and 3 of 3 in Section II; 5 points each, a quarter of the section score each. About 12 minutes suggested for each. Four-function calculator allowed.
The question and its sources
Economists studying the market for city bus rides in Harlow, a perfectly competitive market, estimate the following.
Findings for Harlow's bus-ride market
When average household income in Harlow rises by 10%, the quantity of bus rides demanded falls by 5%, other things equal.
When the price of gasoline rises by 20%, the quantity of bus rides demanded rises by 8%, other things equal.
Source: Hypothetical scenario
Suggested time: 12 minutes
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Part (a)
1 pointCalculate the income elasticity of demand for bus rides. Show your work.
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Part (b)
1 pointBased on your answer to part (a), identify whether bus rides are a normal good or an inferior good in Harlow. Explain.
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Part (c)
1 pointCalculate the cross-price elasticity of demand for bus rides with respect to the price of gasoline, and identify whether bus rides and gasoline are substitutes or complements. Show your work.
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Part (d)
2 pointsSuppose that at the same time, the price of gasoline rises and the wages of bus drivers rise. Identify the effect on (i) the equilibrium price of bus rides and (ii) the equilibrium quantity of bus rides. Explain.
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