Question

The Illinois Central Railroad once asked the Illinois Commerce Commission for permission to increase its commuter rates by 20 percent. The railroad argued that declining revenues made this rate increase essential. Opponents of the rate increase contended that the railroad's revenues would fall because of the rate hike. It can be concluded that:
(a) Both groups felt that the demand was elastic but for different reasons. both groups felt that the demand was inelastic but for different reasons
(b) The railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.
(c) The railroad felt that the demand for passenger service was elastic and opponents of the rate increase felt it was inelastic.

Answer 1

Answer:

The answer is: B) The railroad felt that the demand for passenger service was inelastic and opponents of the rate increase felt it was elastic.

Explanation:

If the demand for a product or service is price inelastic, then if the price of that product or service increases, the quantity demanded will decrease at an smaller rate (e.g. price increases by 20%, quantity demanded decreases by 10%).

If the demand is price inelastic, the opposite happens. (e.g. if the price of a good increases by 10%, the quantity demanded for the product will decrease by 20%).