Question

In: Economics

The Acmeville Metropolitan Bus Service currently charges $ 0.99 for an all-day ticket, and has an...

The Acmeville Metropolitan Bus Service currently charges $ 0.99 for an all-day ticket, and has 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 $ 1.1 . The marketing department's studies indicate this price increase would reduce usage to 359 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.

Solutions

Expert Solution

At present Bus service charges $0.99 for an all day ticket and has an average of 623 riders a day.

Bus company is considering increasing the ticket price to $1.10. However, this will reduce the ridership to 359 riders per day.

Calculate the precentage change in quantity of rides demanded -

Percentage change in quantity of rides demanded = [(New quantity of rides demanded - Old quantity of rides demanded)/Old quantity of rides demanded] * 100

Percentage change in quantity of rides demanded = [(359 - 623)/623] * 100 = -42.37%

The percentage change in quantity of rides demanded is -42.37%

Calculate the percentage change in price -

Percentage change in price = [(New price - Old price)/Old price] * 100

Percentage change in price = [(1.1 - 0.99)/0.99] * 100 = 11.11%

The percentage change in price is 11.11%

Calculate the price elasticity of demand -

Price elasticity of demand = Percentage change in quantity of rides demanded/Percentage change in price

Price elasticity of demand = -42.37/11.11 = -3.81

Thus,

The price elasticity of demand for bus tickets is 3.8

Rahul Sunny answered 6 months ago
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