Need help with total revenue increase 12. You are given the following informatio

Question

Need help with total revenue increase

12. You are given the following information about the transit system in a city: the elasticity of demand is 0.40 the current price of a ticket is $2.00 daly revenue from ticket sales for the transit system 1s $100,000 The manager of the transit svstem wants to increase revenue and is considering increasing the fare from $2.00 to $2.14. He asks you what the prospective fare increase will do to revenue. A good estimate for the percentage change in daily revenue from ticket sales in response to the price increase (rounding to the nearest integer) is: A) 0% G)-1% H)-2% 1)-3% B) +1% C) +2% D) +3% E) +4% F)-4% J) none of the above

Explanation / Answer

E) +4%

Elasticity of demand= %change in quantity/%change in price = 0.40

Current price = $2 and current quantity = 100,000/2 = 50,000

% change in price = 0.14/2 = 0.07
=> %change in quantity = 0.4*0.07 = 0.028 (i.e. the quantity must fall by 2.8%)

Change in quantity = (1 -0.028)*50000 = 48,600

New revenue = 48,600*2.14 = $104,004 (revenue has increased!)

% change in revenue = (104,004 – 100,000)*100/100,000 = 4004*100/100,000 = 4% (rounded off)

Related Questions

Navigate

• Browse (All)
• Browse N
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.