Question

The acmeville metropolitan bus service currently charges $0.88 for an all-day ticket, and is used by an average of 513 riders a day. the bus company is not earning a profit, but according to their contract with the city, they cannot cut the number of buses on the road. they must therefore find a way to increase revenues. the bus company is considering increasing the ticket price to $0.99. the marketing department\'s studies indicate this price increase would reduce usage to 249 riders per day. calculate the absolute value of the price elasticity of demand for bus tickets using the simple percentage change method to determine if the bus company should increase price or decrease price to increase revenues.

Answer 1

Price elasticity demand = change in demand with respect to change in price
Price elasticity demand = abs[{($0.88-$0.99)/$0.88x 100}/{(513-249)]/513x100}
                                        = 12.5% increase in price/ decrease of 40.16% passengers.

This method of increasing the ticket price is not feasible because the bus service is elastic, which means a small change in the ticket price of $0.11 or 12.5% would mean huge effect on decreasing the number of passengers of 40% or 264 riders reducing the income considerably. By doing the opposite, the bus company will decrease the ticket price to $0.77 in effect the number of riders will increase to 777 thus will make an income increase of  31.86% or $143.85. With this comparison of data, I would suggest the bus company would decrease the ticket price instead of increasing it.