Question

You have been hired by the city to determine whether or not an increase in the price of tickets for the mass transit system would raise system revenue. The debate has been heated, and the city council seems to be divided.

Side A argues that to increase revenues from the transit system, prices must be increases. Side B argues that a price increase at this time will lower revenues.

What assumptions are each side making about the price elasticity of demand (be sure to mention what factors may impact elasticity/inelasticity) and how might you determine the best course of action?

Answer 1

Answer.

Side A argues that increase in price will increase the revenues means they are assuming that there is less elasticity of demand because of their good quality service. They are assuming consumer will not go away even if they increase the price of the ticket.

Side B argues that increase I price will decrease the price means they are assuming that the elasticity of demand is more because of the availability of substitutes and that is why the consumer will shift their demand and that they will end up with fewer revenues.

We can determine the elasticity of demand by an increase in price for some time and then observing the demand for the transit system. if it lowers the demand then price should remain same and if the demand decreases they should decrease the price to its initial level.