Question

Suppose a subway line determines it can charge different prices to riders during rush hour and riders who travel on the weekend or during off-peak hours. The subway line’s goal is to increase total revenue. The price elasticity of demand for riders during rush hour is -0.60, and the price elasticity of demand for off-peak travelers is -2.50. Based on the price elasticity of demand for each group of people, how should the subway line adjust its prices?

Answer 1

Answer:

Explanation:

Price elasticity of demand is a concept that seeks to measure the sensitivity of demand to the price of a good or service. Thus, if demand is elastic, it means that even small variations in price have a strong impact on demand. Conversely, if demand is inelastic, variations in the price of the good will not greatly affect demand, meaning consumers will continue to demand that particular good or service. The calculation of the price elasticity of demand consists in the division between the variation of the quantity demanded by the variation in the price practiced. If the result is greater than 1 (in module), demand is considered elastic (price sensitive). Conversely, if elasticity is less than 1 (in module), demand is considered inelastic (little price sensitive). If elasticity equals one, then the change in demand is exactly the same as the price change.

In this case, the demand for tickets is inelastic at peak hours (| -0.60 | <1) and elastic at alternative times (| -2.50 |> 1). This means that consumers are more sensitive to price increases at alternative times and less sensitive to price increases at peak times. Thus, the subway company should increase the price of tickets at peak hours and lower the price at alternative times to increase revenues.