The total operating revenues of a public transportation authority are $100 milli

Question

The total operating revenues of a public transportation authority are $100 million while its total operating costs are $120 million. The price of a ride is $1 and the price elasticity of demand for public transportation has been estimated to be -0.4. By law, the public transportation authority must take steps to eliminiate its operating deficit. (a) Should the transportation authority increase or decrease the price per ride based on the price elasticity of demand? (b) Using the following equation : Delta Q/ Qdivided by Delta P/P- Increase the price of a ride to$1.50

Explanation / Answer

This is very easy, Since the elasticity for demand is negative, an increase in price will increase total revenue. Currently we are running a deficit of 100 million-120 million=-20 million. If we now look at dQ/Q *p/dp we see -.4=dQ/Q*1.5/-.5 dQ/Q=.2/1.5 dQ/Q=.13 This is our slope therefore, we will have a 13% increase in revenue by increasing the price. We will have a total revenue of 100 million *1.13=113 million and we will now only have a deficit of 7 million Hope this helps

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