The cab fare in Horseville is regulated. Recently, the government decided to raise it from $2.00 to $2.50 per ride. After this rise in fare, cab ridership decreased by 10 percent

a) What is the price elasticity of demand for cab rides in Horseville? (Use the midpoint formula to calculate the percentage change in the price.) Is the demand for rides elastic or inelastic? b) According to your estimate, what happened to the cab drivers' revenue after the fare rose? Explain. c) Why might your estimate of elasticity be inaccurate?

a) The percentage change in the price is the change in the price, $0.50, divided by the average price, $2.25, multiplied by 100, or ($0.50/$2.25 ) × 100, which is 22.2 percent. The percentage change in quantity is 10 percent. So the price elasticity of demand is 10%/22.2%, which equals 0.45. The demand for rides is inelastic because the elasticity, 0.45, is less than 1.
b) The drivers' revenue increased. If the demand for rides is inelastic, the percentage change in price, which raises total revenue, is greater than the percentage change in quantity, which lowers total revenue. So, on net, total revenue increases.
c) The estimate may be inaccurate because we are not sure that the decline in ridership resulted only from the rise in fare and not from other factors that could influence the quantity of rides demanded.