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

when the new york city opera faced a growing deficit, it cut its ticket 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 a deficit necessarily wrong? explain?

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Expert Solution

These approaches cannot be determined as right or wrong in the absolute sense. Here, the concept of price elasticity of demand comes into play.

For the new york city opera, reduction in prices will attract more customers only if the demand is elastic for its services. When the demand is elastic, the percentage change in quantity is more than the percentage change in prices. The total revenue for NYC opera will rise only if the percentage change in number of customers is more than 20% (percentage change in price). This will only happen if the demand for opera is elastic.

For the subway services, the raised subway fares will only generate higher revenue if the demand is inelastic for their services. If the percentage decline in quantity demanded of subway services is less than the percentage rise in prices, it implies that demand is inelastic. Only this situation will lead to higher revenue and reduction in deficit for the transit authority.

If these given conditions prevail, then both the strategies are correct. If the elasticity of demand is not as expected in each case, then these strategies will not work.

Rahul Sunny answered 1 year ago

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