UNIVERSITY OF MANAGEMENT AND TECHNOLOGY SCHOOL OF

PROFESSIONAL ADVANCEMENT BF 405 ASSIGNMENT NO: 2 FALL 2019

GROUP MEMBERS: M.AFAQ HAIDEER

ALMAHA IBRAR
AYESAH KHALID
NARMEEN QAYYOM

Afia Mushtaq
11/11/2019
UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

Name: M.AFAQ HAIDER.

ALMAHA IBRAR
AYESHA KHALID
NARMEEN QAYYOM

MAX.MARKS 25.

DUE DATE :29-11-19

1. For each of the following pairs of goods, which good would you expect to
Have more elastic demand and why?

a. Required textbooks or mystery novels.

Mystery novels have more elastic demand than required textbooks, because
mystery novels have close substitutes and are a luxury good, while required
textbooks are a necessity with no close substitutes. If the price of mystery
novels were to rise, readers could substitute other types of novels, or buy
fewer novels altogether. But if the price of required textbooks were to rise,
students would have little choice but to pay the higher price. Thus the
quantity demanded of required textbooks is less responsive to price than the
quantity demanded of mystery novels.
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

b. Beethoven recordings or classical music recordings in general.

Beethoven recordings have more elastic demand than classical music

recordings in general. Beethoven recordings are a narrower market than
classical music recordings, so it's easy to find close substitutes for them.
If the price of Beethoven recordings were to rise, people could substitute
other classical recordings, like Mozart. But if the price of all classical
recordings were to rise, substitution would be more difficult (a transition
from classical music to rap is unlikely!). Thus the quantity demanded of
classical recordings is less responsive to price than the quantity
demanded of Beethoven recordings.

c. Heating oil during the next six months or heating oil during the next
five years.

Heating oil during the next five years has more elastic demand than
heating oil during the next six months. Goods have a more elastic
demand over longer time horizons. If the price of heating oil were to rise
temporarily, consumers couldn't switch to other sources of fuel without
great expense. But if the price of heating oil were to be high for a long
time, people would gradually switch to gas or electric heat. As a result,
the quantity demanded of heating oil during the next six months is less
responsive to price than the quantity demanded of heating oil during the
next five years.
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

2. Suppose that business travelers and vacationers have the following

demand for airline tickets from New York to Boston.

Price Qd-Business Travel Qd-Vacation Travel

$150 2,100 1,000
$200 2,000 800
$250 1,900 600
$300 1,800 400
a) As the price of tickets rises from $200 to $250, what is
the price elasticity of demand for: SHOW YOUR
WORK

 Business travel
 Vacationers

Price elasticity for business travellers

= (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2]
= [(1900-2000)/1950]/[(250-200)/225]
= -0.23
Therefore, elasticity = |-0.23| = 0.23

Price elasticity for vacationers

= (Q2-Q1)/[(Q2+Q1)/2]/(P2-P1)/[(P2+P1)/2]
= [(600-800)/700]/[(250-200)/225]
= -1.29
Therefore, elasticity = |-1.29| = 1.29
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

b. Why might vacationers have different elasticity than business

travelers?

For vacationers, travel is of less necessity compared to business

travellers. Vacationers have longer time horizon for travel while the
business travellers have a very short time to travel. Vacationers also have
several other subsitutes like travelling by car. That substitute is not
appropiate for business travellers as they need to reach faster to their
place of destination. This is why vacationers will have a higher elasticity
of demand for air tickets compared to the business travellers
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

3. The New York Times reported that subway ridership declined after a
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.”

a. Use this data to estimate the price elasticity of demand for subway
rides.
HINT: PERCENTAGE METHOD.

Number of riders Q1= 4 million

Price initially = 1.25 (25 cents less than 1.50)

Price now = $1.5
Increase in price = 1.5-1.25 / 1.25 = 0.25/1.25 = 20%

-4.3 as the percent change in ridership, hence elasticity = % change in

Quantity/ % change in price =-4.3/20 = -0.215

This demand <1 hence inelastic.

Also, original subway token price = 4 million/.043 = 9302326 or 93 million
Hence revenue = P*Q = 1.25* 93 = $116.25 million
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

(B) According to your estimate, what happens to the Transit

Authority’s revenue when the fare rises?

In dec 95 users are 4 miilion lesser which is = 93 million - 4 =89

million

So revenue = 89*1.5 = $133.5 million

So revenue has increased.

C. Why might your estimate of the elasticity be unreliable?

Other factors could be a comparitively smalleer drop in ridership or

transportation costs
 UNIVERSITY OF MANAGEMENT AND TECHNOLOGY
SCHOOL OF PROFESSIONAL ADVANCEMENT
BF 405 ASSIGNMENT NO: 2 FALL 2019

4. Go to the library and read two articles economic theories that we have
discussed in this class. State the name and date of the article and
summarize the article in your own words. 5 points apiece for a total of
10 points.

Article #1

Article #2