Sapling Learning The Acmeville Metropolitan Bus Service curr

Sapling Learning The Acmeville Metropolitan Bus Service currently charges $O.77 for an all-day ticket, and is used by an average of 623 riders a day. The bus company is not earning a profit, but according to their contract with the city, they cannot cut the number of buses on the road. They must therefore find a way to increase revenues. Tofe ats conmpnemy lh considering notea ntrit rktng departments studies indicate this price increase would reduce usage to 346 riders per day Calculate the absolute value of the price elasticity of demand for bus tickets using the simple percentage change method to determine if the bus company should increase price or decrease price to increase revenues. Price elasticity of demand is nd is inelastic, so increasing ticket prices will increase revenue Demand is elastic, so increasing ticket prices will increase revenue. O Demand is elastic, so decreasing ticket prices will increase revenue. O Demand is inelastic, so decreasing ticket prices will increase revenue O Previous 3 Give Up & View Solution (2) Check Answer Next Exit Hint

Solution

Initial price = $0.77 per ticket

Initial quantity = 623 riders

New price = $0.99 per ticket

New quantity = 346 riders

Calculate the percentage change in price -

% change = [(New price - Initial price)/Initial price] * 100 = [(0.99 - 0.77)/0.77] * 100 = 28.57%

Calculate the percentage change in quantity demanded -

% change = [(New quantity - Initial quantity)/Initial quantity] * 100 = [(346 - 623)/623] * 100 = -44.46%

Calculate the price elasticity of demand -

Ed = % change in quantity demanded/% change in price = -44.46/28.57 = -1.56

The Price elasticity of demand is -1.56. (This value can be written without negative sign as well).

So, the absolute value of the price elasticity of demand is 1.56

The value of the price elasticity of demand is greater than 1.

This means demand is elastic.

In case of elastic demand, increase in price leads to decrease in total revenue and vice-versa.

Hence, the correct answer is the option (3).