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The Acmeville Metropolitan Bus Service currently charges $0.77 for an all-day ticket, and has an average of 472 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 $ 0.99 . The marketing department's studies indicate this price increase would reduce usage to 195 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.

Respuesta :

jepessoa

Answer:

price elasticity of demand = -2.05, price elastic, or in absolute terms 2.05, price elastic

Explanation:

the formula to calculate price elasticity of demand is:

PED = % change in quantity / % change in price

  • % change in quantity = [(195 - 472) / 472] x 100 = -58.69%
  • % change in price = [($0.99 - $0.77) / $0.77] x 100 = 28.57%

PED = -58.69% / 28.57% = -2.05

Generally when we calculate PED we use absolute values, i.e. this PED = 2.05. When PED > 1, price elastic, which means that any change in price will result in a larger change in quantity demanded. When PED < 1, price inelastic, which means that any change in price will result in a smaller change in quantity demanded. When PED = 1, unit elastic, which means that any change in price will result in a proportional and inverse change in quantity demanded.

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