Point Price Elasticity of Demand
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The total operating revenues of a public transportation authority are $100 million while its total operating costs are $120 million. The price of a ride is $1, and the price elasticity of demand for public transportation has been estimated to be -0.4. By law, the public transportation authority must take steps to eliminate its operating deficit. (a) What pricing policy should the transportation authority adopt? Why? (b) What price per ride must the public transportation authority charge to eliminate the deficit if it cannot reduce costs? USE POINT PRICE ELASTICITY OF DEMAND FORMULA.
MY ANSWER
In order to eliminate its deficit, the transportation authority must increase the price of a ride. Unless the company is willing to cut services/routes or its figures out a way to cut operating costs, increasing the cost of a ride is its best option for covering costs. In addition, because public transportation is a necessity and not a luxury, the majority of bus riders will have no choice but to pay the increased fair. Otherwise, the transportation authority will have to implement service cuts in response to its financial crisis, unless it finds a way to earn additional funds.
Qx = 100 -.4Px - .4Py
Qx = 100 -.4(1.00) -.4(1.50)
Qx = 100 -.40 -.60
Qx = 99
(Q2 - Q1) (P2+P1) / (Q2 + Q1) (P2 - P1)
(99-100)(1.50+1.00) / (99+100)(1.50-1.00) =
-1x2.50 / 199x.50 =
-2.50/99.50 = -.04%
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Solution Summary
Point Price Elasticity of Demand is determined.
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(a) What pricing policy should the transportation authority adopt? Why?
In order to eliminate its deficit, the transportation authority must increase the price of a ride. Unless the company is willing to cut services/routes or its figures out a way to cut operating costs, increasing the cost of a ride is its best option for covering costs. The demand for public transportation is ...
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