Question

The Acmeville Metropolitan Bus Service currently charges $0.67 for an all-day ticket, and has 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. The bus company is considering increasing the ticket price to $ 0.89 . The marketing department's studies indicate this price increase would reduce usage to 372 riders per day. Calculate the absolute value of the price elasticity of demand for bus tickets using the simple percentage change method. Round your answer to one decimal place.

Answer 1

Answer:

PED: 1.2

Explanation:

The price elasticity of demand indicates how the quantity demanded change when the prices change. Is defined by this equation:

Price Elasticity of Demand(PED)= Percentage change in Q/ Percentage change in P

The simple percentage change method formula is:

((Final value-Initial value)/ Initial value)*100

The percentage change in Q is:

372-623/623= -0.403*100=-40.3% ( It is negative because if the price increases, the quantity demanded decreases)

The percentage change in P is:

0.89-0.67/0.67= 0.328*100= 32.8%

The PED is:

-40.3%/32.8%= -1.22

In absolute value and rounded to one decimal place:

PED: 1.2

Because the answer is greater than 1 it is considered that the demand for bus tickets is elastic, which means that a change in price will result in a greater change in quantity demanded.