If taxi fares in a city rise, what will happen to the total revenue received by taxi operators?
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If taxi fares in a city rise, what will happen to the total revenue received by taxi operators? If the fares charged for subway rides, a substitute for taxi rides, do not change, what will happen to the total revenue earned by the subway as a result? |
Explanation
The increase in the taxi fares in the city will lead to the movement up along a demand curve for the taxi rides. If demand is elastic, this will lead to the decrease or fall in total revenue as more individuals will look for substitute means of riding. However, if the demand is inelastic, it will lead to the increase in total revenue as the individuals are less sensitive to the increase in fare (it will have a larger impact on the increase in revenue than the decrease in consumption).
If the fares charged for the subway rides (the substitute for the taxi rides) actually do not change, the total revenue earned by the subway will increase as a result of the increase in taxi fares. This is because the increase in the taxi fares will lead to an increase in demand for the subway rides since it is a substitute for the taxi rides, a factor that will lead to the increase in the total revenue of subway.
Reference
Sexton, R. L. (2020). Exploring economics.Thousand Oaks, California SAGE.
Answer
The total revenues of the taxi will decrease or increase depending on elasticity of demand.
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