Question

The Acmeville Metropolitan Bus Service currently charges $0.99$0.99 for an all-day ticket, and has an average of 513513 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 $ 1.211.21 . The marketing department's studies indicate this price increase would reduce usage to 236236 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 Number Price elasticity of demand isa. Demand is inelastic, so decreasing ticket prices will increase revenue. b. Demand is elastic, so decreasing ticket prices will increase revenue. c. Demand is inelastic, so increasing ticket prices will increase revenue. d. Demand is elastic, so increasing ticket prices will increase revenue.

Answer 1

The simple percentage method determines an elasticity of -2.31% that says that the increase in price has a mayor impact in the number of passengers that won’t use the bus.

Given the previous scenario the best decision to take for the company is the following:

Demand is elastic, so decreasing ticket prices will increase revenue