(solution) 1. 'Bus system heading for a crash' was a headline in the

1. ?Bus system heading for a crash? was a headline in the Sydney Morning Herald of 15September 2008.The newspaper was reporting the results of a study by David Hensher of SydneyUniversity on the impact of the range of petrol price increases that had been projectedby various media and scientific sources. The range of speculation was covered by arise in petrol prices from $1.25 in 2007 to $2 in 2009 and thereafter a rise of $1 a year through to $10 a litre in 2017. The news story drew attention to the pressure on the bus system from the change in the price of petrol. In a related study, and considering the case of Melbourne, Hensher found that the petrol price rises (with no other changes)would reduce the number of passenger-vehicle kilometres travelled (24.42 billion km in 2007) by 25 per cent between 2007 and 2017 and would increase bus and tram patronage by 250% and 134% respectively.

a. Calculate the cross price elasticity of car travel (as measured by passenger kilometres) with respect to the price of petrol over this time period. Comment on the sign of your estimate.

b. Is the cross elasticity of demand of bus and tram travel positive or negative with respect to the change in petrol price? Provide an interpretation of your answer.

c. What do you expect would be the cross elasticity of demand of train travel with respect to the price of petrol? Explain your answer.

 

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