New York City officials believed they needed more revenue
to maintain 35 city-owned recreation centers. To raise the
additional revenue, the city’s parks department increased
the annual membership fee to use the centers from $75 to
$150. According to an article in the New York Times, “the department
had hoped to realize $4 million in new revenue,
but in fact, it lost about $200,000.” The article also explains
that the parks department had expected a 5 percent decline
in memberships due to the price increase.
a. What did the parks department believe about the
price elasticity of demand for memberships in its
recreation centers?
b. Is demand for memberships actually elastic or inelastic?
Briefly explain. Illustrate your answer with
a graph showing the demand curve for memberships
as the parks department believed it to be and
as it actually is.