Problem:
The Municipal Railway imposed a 67% fare increase on the cable car fare. Prices rose to $5 for cable cars while prices for fares on street cars raised $0.25 to $1.50. Demand for cable cars decreased after the price increase but revenue increased 23%. Cost to operate the cable cars is $312 and for the street cars is $188/hour. For diesel buses it is $121. What is the price elasticity of demand for a cable car ride? What should the company do: raise, lower or leave fares as is if their main goal is to reduce their $57 million operating deficit? Explain how your recommendation will increase profits or lower operating losses.
Additional Information:
This question is basically belongs to the Finance as well as it discusses about whether or not the company's decision of increasing fares of cable cars is a good idea and its impact on operating deficit.