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Pricing Policy: Total Operating Revenue

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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?

Please show all work and explain answers.

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Solution Summary

This solution discusses price elasticity and provides calculations for determining price increases to eliminate the deficit.

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

Price elasticity of demand is -0.4. It means that demand is inelastic at this point. We know that total revenue increases in response to price increase for inelastic demand. So, it is advisable to increase the price ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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