Question

The Acmeville Metropolitan Bus Service currently charges $0.67 for an all-day ticket, and is used by 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 $0.89. The marketing department\'s studies indicate this price increase would reduce usage to 283 riders per day. 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

Answer:

Step 1.

Ghe formula illustrates

Price Elasticity of Demand=percent change in quantity/percent change in price.

Step 2.

Midpoint formula states that:

percent change in quantity=Q2−Q1/(Q2+Q1)÷2×100

percent change in price=P2−P1/(P2+P1)÷2×100

Step 3. Now use the values provided in question.

percent change in quantity=433−283/(433+283)÷2×100=41.89.

percent change in price=0.67-0.89/(0.67+0.89)÷2×100= -28.20.

Step 4.

Now the values can put in to determine the price elasticity of demand:

Price Elasticity of Demand=percent change in quantity/percent change in price: 41.89/-28.20= -1.485.