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If lowering of fares reduces railway’s revenues and increasing of fares increases, them the demand for rail travel has a price elasticity of ——————.
- a)Zero
- b)Greater than zero but less than one.
- c)One
- d)Greater than one
Correct answer is option 'B'. Can you explain this answer?
Most Upvoted Answer
If lowering of fares reduces railway’s revenues and increasing o...
Price elasticity of demand is a measure of the responsiveness of the quantity demanded of a good or service to a change in its price. If the demand for rail travel has a price elasticity of less than one, it means that a change in the price of rail travel will result in a proportionately smaller change in the quantity demanded.
Factors affecting price elasticity of demand
- Availability of substitutes
- Price of substitutes
- Income of consumers
- Time period
Explanation of option 'B'
If the demand for rail travel has a price elasticity of greater than zero but less than one, it means that a change in the price of rail travel will result in a proportionately smaller change in the quantity demanded. For example, if the fare is increased by 10%, the demand for rail travel will decrease by less than 10%.
This is because rail travel has some substitutes like road travel, air travel, etc. However, these substitutes are not perfect substitutes, and people may still prefer to travel by rail even if the price is increased. Moreover, rail travel is a necessity for many people, and they cannot easily switch to other modes of transportation.
Therefore, if the fares are lowered, the demand for rail travel will increase, but the increase in demand will not be proportional to the decrease in fares. Similarly, if the fares are increased, the demand for rail travel will decrease, but the decrease in demand will not be proportional to the increase in fares.
Conclusion
In conclusion, the demand for rail travel has a price elasticity of greater than zero but less than one because there are substitutes for rail travel, but they are not perfect substitutes. Therefore, a change in the price of rail travel will result in a proportionately smaller change in the quantity demanded.
Factors affecting price elasticity of demand
- Availability of substitutes
- Price of substitutes
- Income of consumers
- Time period
Explanation of option 'B'
If the demand for rail travel has a price elasticity of greater than zero but less than one, it means that a change in the price of rail travel will result in a proportionately smaller change in the quantity demanded. For example, if the fare is increased by 10%, the demand for rail travel will decrease by less than 10%.
This is because rail travel has some substitutes like road travel, air travel, etc. However, these substitutes are not perfect substitutes, and people may still prefer to travel by rail even if the price is increased. Moreover, rail travel is a necessity for many people, and they cannot easily switch to other modes of transportation.
Therefore, if the fares are lowered, the demand for rail travel will increase, but the increase in demand will not be proportional to the decrease in fares. Similarly, if the fares are increased, the demand for rail travel will decrease, but the decrease in demand will not be proportional to the increase in fares.
Conclusion
In conclusion, the demand for rail travel has a price elasticity of greater than zero but less than one because there are substitutes for rail travel, but they are not perfect substitutes. Therefore, a change in the price of rail travel will result in a proportionately smaller change in the quantity demanded.
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