Calculation of elasticity of demand.
N May 1970 the trustees of the Village of Potsdam, New York, decided to double the rate charged residents for water, in abundance supply from the local river, I order to pay for their new sewage treatment plant. Two colleges in the village constitute about half the population when they are in session and pat the same water rate as do households.
The Village Administrator's prediction of revenues and the actual results are as follows:
Fiscal year
|
Price per 1000 gallons
|
Predicted estimated revenue
|
Gallons sold (Thousands)
|
Actual revenue
|
June 1969- May 1970
|
$0.60
|
$180,000
|
290,540
|
$174,325
|
June 1970- May 1971
|
1.20
|
360,000
|
278,045
|
336,654
|
a. Illustrate what elasticity of demand did the Village Administrator seem to suppose here in his prediction for 1970- 1971?
b.Compute the approximate elasticity of demand (round off, two decimal places is close enough).
c.Consider the policy advantages of raising the price of water to pay for the sewage plant rather than raising real estate taxes.