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 eliminate its operating deficit.
(a) Is asking whether the transportation authority should increase or decrease the price per ride based upon the price elasticity of demand.
(b) Suggestion – increase the price of a ride from $1 to be $1.50, a 50% increase in price. Given the price elasticity of demand of -0.4, calculate the percentage change in the ride and the total new rides (the original rides are 100 million = $100 million/$1). Then use the total new rides time the new price of $1.50 to obtain the new total revenue.