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Price elasticity of demand and total revenue

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?

Solution Preview

(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.

$2.19