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

Question

The total operating revenues of a public transportation authority are $100 milltion while its tiotal 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 eliminate its operating deficit.
a. what price per ride msust the public transportation authority charge to eliminate the deficit if it cannot reduce costs?
Use equation (3-7.) which is the equation for the price elasticity of demand
*** Use equation (3-12) MR=P(1+1/Ep) and to maximize the profits, MR has to equal MC.

Explanation / Answer

Solution: Given: Price per ride = $1 =>Total Revenues = $100 million =>Current demand = 100 million/1=$100 million rides =>Operating costs = $120 million => Price elasticity = -0.4 As we can see that Price elasticity is negative given as -0.4. It concludes that demand is inelastic. Hence the % change in quantity demanded is smaller than that the % change in price. So it can be seen that when the price is raised, the total revenue will increase. We can therefore conclude that the public transport should increase the price of ride. Please rate

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