In 2017, the Metropolitan Transportation Authority (MTA) in New York City raised the price of a monthly subway pass from $116.50 to $121.00. According to an article in the New York Times, “Officials at the authority have said they must raise fares every two years to pay for the rising costs of providing service.”
a. In order for the MTA’s strategy for covering its rising costs to be successful, what must be true about the price elasticity of demand for subway passes?
b. Suppose that the MTA’s strategy in (a) doesn’t succeed. What then must be true about the price elasticity of demand for subway passes? On the same graph, draw a demand curve for subway passes assuming that the MTA’s strategy succeeds and a second demand curve assuming that the strategy fails. For each demand curve, your graph should indicate the areas representing the revenue the MTA receives following the price increase.