Reference no: EM1327543

Price elasticity of demand for subway rides

1. Read the attached New York Times article â??With Fare Up, Subway Use Drops Sharply.â?
a. Use the data in the article to estimate the price elasticity of demand for subway rides (use the midpoint method).
b. According to your estimate, what happens to the Transit Authorityâ??s revenue when the fare rises?
c. Do you think your estimate is reasonable? Explain your reasons why you think itâ??s reasonable or not.

With Fare Up, Subway Use Drops Sharply - The New York Times
By GARRY PIERRE-PIERRE

After years of working to make New York City's subways cleaner, safer and faster, the Transit Authority reported yesterday that subway ridership in 1995 reached its highest level in 21 years, but then began a sharp decline after the November fare increase.
There were nearly four million fewer riders in December 1995, the first full month after the price of a token increased 25 cents to $1.50, than in the previous December, a 4.3 percent decline.

The fare increase, however, had a more drastic effect on bus ridership, which fell off nearly 11 percent from one December to the next. Bus trips tend to be more discretionary, with only 30 percent of riders using buses to go to work.
The decline in subway ridership after the fare hike had been expected, and was similar to dropoffs that often occurred after previous increases. Transit officials said they were confident enough in the new popularity of the trains to predict that this dropoff, like previous ones, would be temporary. "When you increase the fare, you're going to lose fares, that's historical," said John Cunningham, a spokesman for the Metropolitan Transportation Authority, the Transit Authority's parent agency. "We expect to recover the ridership, because that's also historical."
The ability of the subway system to draw thousands of new riders last year -- some of whom came from the bus system -- cheered subway advocates, who saw it as a promising new trend. "We've been hemorrhaging riders for so long, so it's great that the last two decades of reinvesting in the subways has reversed the longtime trend of losing riders," said Gene Russianoff, a lawyer for the Straphangers Campaign, a mass transit advocacy group. Riders interviewed yesterday agreed they had noticed significant improvements underground that they think are revitalizing the subway system and attracting new riders.
"When I was 12, the cars were a lot dirtier," said Chris Martinez, 16, a high school junior who lives in the South Bronx who has been riding the subways for four years. "There were more homeless people taking up the seats. The trains didn't run on schedule and there were roving gangs of kids. Today, the cars are slightly cleaner. I notice there are more riders and there's no graffiti."
Julia Gittens, 25, a resident of Lefferts Gardens in Brooklyn who works as a paralegal on Queens Boulevard, said she had noticed improvements in lighting and renovations on the platforms.
"They repair the light fixtures when the bulbs burn out, now," said Ms. Gittens, who has been riding for eight years. "In the past, they wouldn't replace them and the platforms would look dark and gloomy. Back then, I refused to ride the trains. Some of the cars are a little cleaner."
Ridership on the subways began a long decline in 1970, when there were 1.3 billion riders a year. The figures leveled off at a billion a year through the 1980's, dipping to 995 million in 1991. But that year, the cleaner cars and improved performance of the trains, the result of increased capital spending that began several years earlier, began to have an effect, producing a four-year ridership increase.

Historically, the flux in subway ridership has often reflected the strength of the city's economy. The more jobs available, the more people ride the subways. When the economy declines, ridership decreases. In 1990, when New York and the country were in a recession, ridership decreased by nearly 4 percent.
"Employment in New York City has always been a strong barometer of subway ridership,"said Harvey Poris, deputy budget director of the Transit Authority. "So many people who work in New York take the subway to work."
But from 1992 to 1995, employment increased only 1 percent while subway ridership increased 9.7 percent, with the biggest rise on weekends. Transit officials credit this surge to the new convenience and safety of the subways for riders making discretionary weekend trips. The transit system has also campaigned to attract tourists underground.
Some of those riders are even coming from the buses, which have traditionally been populated by riders fearful or disdainful of the subway. Transit officials said the city's clogged streets and slow surface speeds are prompting many to switch modes of transportation.
"The perception is that the subways are safer than they were and they are obviously quicker than buses," Mr. Poris said.
The bus system continues to be plagued with problems. More than 45 percent of the 3,600 buses in the fleet are outdated and break down often, causing long waits and occasional disruptions in service.
The fleet also faces stiff competition from the many illegal vans that run along major bus routes in the boroughs outside Manhattan, taking passengers away from the city's buses.
Buses were once the primary mode of transportation for city shoppers. But with the explosion of shopping malls in the suburbs and an increase in car registration in the city, buses became less attractive for many as people, particularly as speeds declined.
"You can walk east-west quicker than we can take you," said Alan F. Kiepper, the Transit Authority president.
The divergent fortunes of the subway and bus systems have led some critics to conclude that the Transit Authority has improved the trains while neglecting the buses.