Question

Suppose that the price of a one-way ferry ticket between Victoria and Vancouver rises from $57.50 to $62.00.
A. Calculate the percentage increase in the price of a ferry ticket.
B. Given that the number of ferry tickets purchased falls by 4% due to the price increase. Calculate the price
elasticity of demand for ferry trips. Use the formula for the price elasticity of demand at a single point, not across an arc.
C. Notice that the consumer demand is price inelastic. Do you think this is realistic? Why or why not.
D. In the scenario described by parts A-C, what will happen to the revenues collected by BC Ferries? Explain.
E. Why do you think it might be important to have price restrictions in place (e.g. government regulations) when
consumer demand for an item is price inelastic?

Answer 1

A) Percentage increase in the price = [(62.00 - 57.50) / 57.50] * 100 = 7.83%

B) Price elasticity of demand = % change in quantity demanded / % change in price

                                               = -4% / 7.83%

                                               = -0.51

The absolute value of price elasticity of demand is 0.51.

C) Yes, this is realistic. Since the price elasticity of demand is less than 1, it meand demand for ferry trip is inelastic.

D) Since demand is inelastic, a 1% increase in price will lead to less than 1% decrease in quantity demanded. In other words, demand for ferry trip is less responsive to changes in price. So, an increase in price will lead to increase in the total revenue collected by BC Ferries.

E) Demand for goods will be inelastic only when the goods are necessaty good. These goods are considered essential for livelyhood. So, if the price of these goods are not regulated by the government, the sellers can extract all consumer surplus by raising it's price. which is not fare.

Therefore, it might be important to have price restrictions in place (e.g. government regulations) when
consumer demand for an item is price inelastic.