Question

The 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 $1.20. The marketing department's studies indicate this price increase would reduce usage to 283 riders per day.
Required:
1. Calculate the price elasticity of demand using the midpoint method for bus tickets to determine if the bus company should increase price or decrease price to increase revenues. Enter your answer as an absolute value and round it to two places after the decimal.

Answer 1

The price elasticity of demand is -2.18. To increase revenues, the company should decrease price.

Step-by-step explanation:

Using the midpoint formula

Price elasticity of demand = (change in quantity demanded/average quantity demanded) ÷ (change in price/average price)

change in quantity demanded = 283 - 433 = -150

average quantity demanded = (283+433)/2 = 716/2 = 358

-150/358 = -0.419

change in price = $1.2 - $0.99 = $0.21

average price = ($1.2 + $0.99)/2 = $2.19/2 = $1.095

$0.21/$1.095 = 0.192

Price elasticity of demand = -0.419 ÷ 0.192 = -2.18 (to 2 decimal places)

The demand for bus tickets is inelastic because the price elasticity of demand is less than 1.

The bus company should decrease price to increase revenues.