Suppose you are the manager of the State Transport Company (STC) and your finance officer has just told you that the company is making losses. To reverse the losses been made by STC, you decide to cut transport services to certain destinations but your board of directors do not want you to cut services, which means that you cannot cut costs. Your only hope is to increase revenue. You consult the economist on your staff who has researched studies on public transportation elasticities and she reports that the estimated price elasticity of demand for the first few months after a price change is about -0.3, but that after several years, it will be about -1.5. (a) Explain why the estimated values for price elasticity of demand differ. (b) Calculate what will happen to ridership and revenue over the next few months if you decide to raise fares by 5%. (c) Compute what will happen to ridership and revenue over the next few years if you decide to raise fares by 5%. (d) What happens to total revenue now and after several years if you choose to raise fares?
Suppose you are the manager of the State Transport Company (STC) and your finance officer has just told you that the company is making losses. To reverse the losses been made by STC, you decide to cut transport services to certain destinations but your board of directors do not want you to cut services, which means that you cannot cut costs. Your only hope is to increase revenue. You consult the economist on your staff who has researched studies on public transportation elasticities and she reports that the estimated price elasticity of demand for the first few months after a price change is about -0.3, but that after several years, it will be about -1.5. (a) Explain why the estimated values for price elasticity of demand differ. (b) Calculate what will happen to ridership and revenue over the next few months if you decide to raise fares by 5%. (c) Compute what will happen to ridership and revenue over the next few years if you decide to raise fares by 5%. (d) What happens to total revenue now and after several years if you choose to raise fares?
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter4: Estimating Demand
Section: Chapter Questions
Problem 6E
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Suppose you are the manager of the state transport company and your finance officer has just told you that the company is making losses .To reverse the losses been made by STC,your decide to cut transport service to certain destination but your board of directors do not want you to cut service,which means that you cannot cut costs.Your only hope is to increase revenue. You result the economist on your staff who has researched studies on public transportation elasticity and she reports that the estimated price.Elasticity of demand for the first few month after a price change is about -0.3 but the that after several year ,it will be about-1.5
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