when the new york city opera faced a growing deficit, it cut its prices by 20%...

when the new york city opera faced a growing deficit, it cut its prices by 20% hoping to attract more customers. at the same time, the new york transit authority raised subway fares to reduce its growing deficit. are one of these two opposite approaches to reducing deficit necessarily wrong? explain full.

Solutions

Expert Solution

These two opposite approaches cannot be stated correct in isolation. However, if we base our analysis on price elasticity of demand, we can understand whether these approaches are correct or not.

The reduction in ticket prices by opera will be able to increase its total revenue (and hence reduce deficit) only if the demand is elastic. This is because when the percentage rise in quantity will be greater than the percentage change in price, the total revenue will rise and it will be beneficial for the company.

On the other hand, the rise in fares by transit authority will be able to raise revenue only if the percentage decline in quantity demanded is less than the percentage rise in fares. In other words, total revenue will rise only when the demand is inelastic in this case.

Thus, if the above scenarios exist, the strategies will work. If elasticity of demand is not as expected, the strategies will not work.

Rahul Sunny answered 1 year ago

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