Purchase Solution

Calculate the Optimal Pricing Strategy using Price Elasticity

Not what you're looking for?

Ask Custom Question

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 at -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?

Purchase this Solution
Solution Summary

This solution shows how to use price elasticity of demand to calculate the public transportation authority's optimal pricing strategy to eliminate its operating deficit. All formulas and calculations are given.

Solution Preview

Price elasticity of demand is the mathematical relationship between a change in price and a change in quantity demanded. The formula is:

Ed = (Q2 - Q1)/Q1 / (P2 - P1)/P1

In this example, Ed = -0.4, P1 = 1 and Q1 = 100 million.

a) Ed is between 0 and -1, which means that at the current price, public transportation is price inelastic. The public transportation authority can increase ...

Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

View More Free Quizzes
Related BrainMass Solutions

  • Pricing Calculations for Optimal Prices

    Calculate the target price using Target Return pricing.

  • Carol Vessey Current Pricing Practices: Optimal Markup on Cost and Price

    Calculate the optimal markup on cost and optimal markup on price for each model, based on the following estimates of the point price elasticity of demand. (COPY AND PASTE THE TABLE TO YOUR WORD DOCUMENT.)

  • Optimal Markup on cost and optimal markup on price

    the optimal markup cost and optimal markup price for each product, based on the following estimates of the point price elasticity of demand: Product Price Optimal Markup Optimal Markup

  • Pricing Strategies for Firms with Market Power

    Determine the optimal pricing strategy, and explain why it is the best pricing strategy. The optimal pricing strategy is to have premium pricing during the winter months and low pricing during non-winter months.

  • imperfect competitive market

    Calculate the arc price elasticity of demand for Lean Jeans. Based on the previous question and using markup pricing, B) If marginal cost per unit is $20, was the original $50 price optimal? C) What would be the optimum price? A.

  • Describe each of the primary methods used for setting price

    Pricing using demand estimation means setting up optimal price where Marginal Revenue= Marginal Cost. It takes into account demand and cost estimations for arriving at an optimal price.

  • Price Elasticity and Price Discrimination

    Reference: http://smallbusiness.chron.com/price-elasticity-optimal-pricing-policy-36020.html The expert discusses a scenario related to price elasticity of demand and appropriate pricing strategy for a restaurant.

  • Two part pricing strategy

    How much additional profit do you earn using a two part pricing strategy compared with charging the consumer a per unit price? a. Determine the optimal two part pricing strategy.

  • Using Arc Formula for Elasticity

    How do I determine the optimal price using the linear approximation method, cost plus pricing and mark-up pricing. How does the arc formula for elasticity factor in to these equations? Suppose at optimal price P, the quantity sold is Q.

View More Related Solutions