Question

The Acmeville Metropolitan Bus Service currently charges $0.77 for an all-day ticket, and has an average of 588 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 311 riders per day. Calculate the absolute value of the price elasticity of demand for bus tickets using the simple percentage change method. Round your answer to one decimal place. price clasticity of demand =

Answer 1

The absolute value of the price elasticity of demand for bus tickets, calculated using the simple percentage change method, is 1.6. This signifies a relatively elastic demand, meaning that the number of riders decreased significantly as the price increased.

Step-by-step explanation:

To calculate the absolute value of the price elasticity of demand for bus tickets, we use the simple percentage change method. The formula for price elasticity of demand (PED) is:

PED = (Percentage Change in Quantity Demanded) / (Percentage Change in Price)

First, we calculate the percentage changes:

• Initial Price = $0.77, New Price = $0.99
• Initial Quantity = 588 riders, New Quantity = 311 riders
• Percentage Change in Price = (($0.99 - $0.77) / $0.77) * 100% = 28.6%
• Percentage Change in Quantity Demanded = ((311 - 588) / 588) * 100% = -47.1%

Now, we plug these values into the formula:

PED = (-47.1%) / (28.6%)

PED = -1.6 (rounded to one decimal place)

The negative sign indicates that the relationship between price and demand is inverse, which is a common characteristic of demand elasticity. However, when referring to the absolute value of elasticity, we are interested in the magnitude, without regard to the direction of the change.

Absolute Value of PED = | -1.6 | = 1.6

Thus, the absolute value of the price elasticity of demand for bus tickets is 1.6, indicating that the demand for bus tickets is somewhat elastic. This means that the bus company facing issues with profit due to its contract with the city would see a relatively significant decrease in ridership with an increase in price.