Question

The Acmeville Metropolitan Bus Service currently charges $0.88 for an all-day ticket, and is used by an average of 623 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 $1.10. The marketing department's studies indicate this price increase would reduce usage to 333 riders per day. Calculate the price elasticity of demand for bus tickets to determine if the bus company should increase price or decrease price to increase revenues.

Answer 1

The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. In this case, the price elasticity of demand is calculated to be -1.876, indicating inelastic demand. Therefore, the bus company should decrease the price to increase revenues.

Step-by-step explanation:

The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. It is calculated by dividing the percentage change in quantity demanded by the percentage change in price. A price elasticity of demand greater than 1 indicates elastic demand, meaning that a decrease in price would lead to an increase in revenue. In this case, the price elasticity of demand is calculated as follows:Percentage change in quantity demanded = ((333-623)/623) x 100 = -46.89%Percentage change in price = ((1.10-0.88)/0.88) x 100 = 25%Price elasticity of demand = (-46.89%/25%) = -1.876Since the price elasticity of demand is less than 1, the demand for bus tickets is inelastic. This means that a price increase would lead to a decrease in revenue. Therefore, the bus company should decrease the price to increase revenues.