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Calculating the required change in price

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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?

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Solution Summary

Solution describes the methodology to calculate the new price which will enable the transport authority to eliminate the deficit.

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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 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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