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?

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(a) What pricing policy should the transportation authority adopt? Why?

It is given that price elasticity of demand is-0.4. Absolute value of price elasticity is less than 1. It is in the inelastic range. In inelastic range, any rise in price will result in increase in total revenue. So, the public transportation authority should increase the price of ride.

(b) What price per ride must the public ...

Solution Summary

Solution discusses the policy which should be adopted to recover the operating expanses. It also calculates the needed change in price to meet the objective.

... in price will result in more than 1% decrease in quantity demanded. For elastic demand, total revenues increase if we decrease the price and decrease ...

... of demand and state whether demand is elastic... to $2.50 per gallon, the quantity demanded falls from 100 ... Where Ep = Coefficient of price elasticity Q1 = original ...

...Price Elasticity of Demand and Revenue. ... a.Plot the demand curve ie, Qd = F (p) b.Use the data in Table IV to find the total... SHOW the formula for total revenue. ...

... Any price increases lowers total revenue in case of elastic demand. So, raising price is not recommended if the company's only goal is to increase revenues. ...

... the absolute value of the elasticity coefficient is less than1.) c) Therefore, lowering the price reduced the ... Explanation: when the demand is inelastic, the ...

... This is consistent with the law of demand, ie as price increases quantity demanded will be ... This is due to the fact that price elasticity of demand is unit ...

... d. A firm with total revenues of $250,000, explicit costs of $275,000 ... each of the following absolute values of price elasticity of demand, indicate whether ...