Question

he Acmeville Metropolitan Bus Service currently charges $0.99 for an all-day ticket, and has an average of 433 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 $1.21. The marketing department\'s studies indicate this price increase would reduce usage to 169 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

Answer:

2.77

the bus company should  decrease price to increase revenues.

Explanation:

Price elasticity of demand measures the responsiveness of quantity demanded to changes in price of the good.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price

If the absolute value of price elasticity is greater than one, it means demand is elastic. Elastic demand means that quantity demanded is sensitive to price changes.

Demand is inelastic if a small change in price has little or no effect on quantity demanded. The absolute value of elasticity would be less than one

Demand is unit elastic if a small change in price has an equal and proportionate effect on quantity demanded.

percentage change in price = 1.21 / 0.99 - 1 = 0.222 = 22%

Percentage change in quantity demanded = 169 / 433 = -0.6097 = - 60.97%

Elasticity of demand = 60.97% /  22% = 2.77

Demand is elastic, so if price in reduced, there would be a rise in quantity demanded that would exceed the rise in price. This would increase revenues