The total operating revenues of 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 calculated to be -0.4. By law, the public transportation authority must take steps to reduce its operating deficit.
a. Explain what pricing policy should the transportation authority adopt? (Should the transportation authority increase or decrease the price per ride based on the price elasticity of demand?)
b. Discuss what price per ride must the public transportation authority charge to remove the deficit if it cannot reduce costs? (Increase the price of a ride from $1 to be $1.50, and 50 percent increase in price. Given the price elasticity of demand of -0.4, determine the percentage change in the ride and the total new rides with the original rides being 100 million = $100 million/$1) using the equation: point price elasticity of demand = Ep=change in quantity/ change in price times price/quantity. Then use the total new rides time the new price of $1.5 to obtain the new total revenue.