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Elasticity - Regression - Q2

The Southeastern Transportation Authority faces rising deficits and was considering service cuts or a fare increase. A demand study was conducted using regression analysis of ridership data from 1966-1992. The analysis found that ridership is negatively impacted by price and income but positively by population and parking rates. If the fare is increased to $1.50, weekly revenue is expected to increase by $356,225 despite an elasticity-induced ridership decrease, as demand is inelastic.

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84 views

Elasticity - Regression - Q2

The Southeastern Transportation Authority faces rising deficits and was considering service cuts or a fare increase. A demand study was conducted using regression analysis of ridership data from 1966-1992. The analysis found that ridership is negatively impacted by price and income but positively by population and parking rates. If the fare is increased to $1.50, weekly revenue is expected to increase by $356,225 despite an elasticity-induced ridership decrease, as demand is inelastic.

Uploaded by

SN Khairudin
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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Demand estimation

Early in 1993, the Southeastern Transportation Authority (STA), a public


agency responsible for serving the commuter rail transportation needs of a large
Eastern city, was faced with rising operating deficits on its system. Also, because
of a fiscal austerity program at both the federal and state levels, the hope of
receiving additional subsidy support was slim.

The board of directors of STA asked the system manager to explore


alternatives to alleviate the financial plight of the system. The first suggestion
made by the manager was to institute a major cutback in service. This cutback
would result in no service after 7:00 pm, no service on weekends, and a reduced
schedule of service during the midday period Monday through Friday. The board
of STA indicated that this alternative was not likely to be politically acceptable
and could only be considered as a last resort

The board suggested that because it had been over five years since the
last basic fare increase, a fare increase from the current level of $1 to a new level
of $1.50 should be considered. Accordingly, the board ordered the manager to
conduct a study of the likely impact of this proposed fare hike.

The system manager has collected data on important variables thought to have a
significant impact on the demand for rides on STA. These data have been
collected over the past 24 years and include the following variables:

1. Price per ride (in cents) - This variable is designated P in Table 1. Price is expected to
have a negative impact on the demand for rides on the system.

2. Population in the metropolitan area serviced by STA - It is expected that this variable has
a positive impact on the demand for rides on the System. This variable is designated T in
Table 1

3. Disposable per capita income - This variable was initially thought to have a positive
impact on the demand for rides on STA This variable is designated I in Table 1

4. Parking rate per hour in the downtown area (in cents) this variable is expected to have a
positive impact on demand for rides on the STA. It is designated H in Table 1.
Table 1
Year Weekly Price (P) per Population (T) Income (I) Parking Rate
Riders (Y) Ride (X1,000) (H) (Cents)
(X1,000)
1966 1,200 15 1,800 2,900 50
1967 1,190 15 1,790 3,100 50
1968 1,195 15 1,780 3,200 60
1969 1,110 25 1,778 3,250 60
1970 1,105 25 1,750 3,275 60
1971 1,115 25 1,740 3,290 70
1972 1,130 25 1,725 4,100 75
1973 1,095 30 1,725 4,300 75
1974 1,090 30 1,720 4,400 75
1975 1,087 30 1,705 4,600 80
1976 1,080 30 1,710 4,815 80
1977 1,020 40 1,700 5,285 80
1978 1,010 40 1,695 5,645 85
1979 1,010 40 1,695 5,800 100
1980 1,005 40 1,690 5,900 105
1981 995 40 1,630 5,915 105
1982 930 75 1,640 6,325 105
1983 915 75 1,635 6,500 110
1984 920 75 1,630 6,612 125
1985 940 75 1,620 6,883 130
1986 950 75 1,615 7,005 150
1987 910 100 1,605 7,234 155
1988 930 100 1,590 7,500 165
1989 933 100 1,595 7,600 175
1990 940 100 1,590 7,800 175
1991 942 100 1,600 8,000 190
1992 955 100 1,610 8,100 200

The transit manager has decided perform a multiple regression on the data to deter mine the
impact of the rate increase.
QUESTIONS
1. What is the dependent variable in this demand study?
The Dependent variable is ridership. For this study, ridership is labeled Y and is
measured in thousands.

2. What are the independent variables?


The independent variables are price, population, income, and parking rates. For this
study, they are labeled P, T, I, & H, respectively. P is measured in cents. T is measured
in thousands of residences. I is measured in dollars. H is measured in cents.

3. What are the expected signs of the variables thought to affect transit ridership on STA?

Variable Label Variable Increase Variable Decrease

Price P Ridership Decrease Ridership Increase

Population T Ridership Increase Ridership Decrease

Income I Ridership Increase Ridership Decrease

Parking Rates H Ridership Increase Ridership Decrease

4. Using a multiple regression program available on a computer to which you have access,
estimate the coefficients of the demand model for the data given in Table 1.

Coefficients

Intercept 85.43924099

Price (P) per Ride -1.617484194

Population (T) (X1,000) 0.643769498

Income (I) -0.047474815

Parking Rate (H) (Cents) 1.943790812


5. Provide an economic interpretation for each of the coefficients in the regression
equation you have computed.
Variable Coefficients Economic Interpretation

Price (P) per Ride -1.617484194 Price has a negative impact on the
demand for ridership. One cent
increase in price will result into
decrease in Ridership by 1617

Population (T) (X1,000) 0.643769498 Population has a positive impact on


the demand for ridership. As
Population Increases by 1000, the
ridership increase by 644

Income (I) -0.047474815 Income has a negative impact on


the demand for ridership. As
Income rises by one unit the
Ridership will decrease by 47.

Parking Rate (H) (Cents) 1.943790812 Paring Price has a positive impact
on the demand for ridership. As
Parking Rates Increases by one
cent the ridership increase by 1944.

6. What is the value of the coefficient of determination? How would you interpret this
result?
This is the value of R-Sqare in the regression output.. The value is 0.96. Higher the value of
R-sqaure the better is the model to predict the dependent variable. The 0.96 indicates that
out of the total variance in the ridership 96% is explained by the model i.e. in dependent
variables price, population, income and parking rate.

7. Calculate the price elasticity using 1992 data.


The equation for Ridership is
Y = 85.439 – 1.617*P+0.644*T-0.047*I+1.944*H
dY/dP= -1.617
Price elasticity = dY/dP*P/Y
In 1992, P=100 and Y = 955
Price elasticity = -1.617*100/955= - 0.169

8. Calculate the income elasticity using 1992 data.


The equation for Ridership is
Y = 85.439 – 1.617*P+0.644*T-0.047*I+1.944*H
dY/dI= -0.047
Income elasticity = dY/dI*I/Y
In 1992, I= 8100, Y = 955
Price elasticity = -0.047*8100/955= -0.3986387

9. If the fare is increased to $1.50, what is the expected impact on weekly revenues to the
transit system if all other variables remain at their 1992 levels?

Since the price elasticity is inelastic range (less than 1), increase in price will increase the
total revenue.
When the fare is increase by $0.50, the ridsership will decrease by –1.617*50= 80.85
thousands

Total revenue now = $1.00*955000=$955,000


Total revenue after price increase = $1.50*(955-80.85)*1000=$1,311,225
So the total revenue will increase by $356,225

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