I need help on some homework questions for an MBA-level Managerial Economics class.

The total operating revenues of a public transportation authority are $100M while its total operatiing costs are $120M. The price per ride is $1, and the price elasticity of demand for transportation ia -0.4. The transportation authority has to elimiate its operating deficit.
(a)What pricing policy should the transportation authority adopt? Why?(b What price per ride must the public transportation authority charge to eliminate the deficit if it cannot reduce costs?

Take a shot, what do you think?

Hint: your given price elasticity is inelastic. So, increasing price should increase revenue.

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To solve this question, we need to understand the concept of price elasticity of demand and how it can be used to determine the optimal pricing policy.

(a) What pricing policy should the transportation authority adopt? Why?

The price elasticity of demand measures the responsiveness of the quantity demanded to a change in price. A negative value like -0.4 indicates that demand is inelastic, meaning that a change in price will have a proportionately smaller effect on the quantity demanded.

In this case, the public transportation authority is facing a deficit in its operating budget, meaning its expenses exceed its revenues. To address this deficit, the authority needs to increase its revenues. One way to achieve this is by adjusting the price per ride.

Given that the price elasticity of demand for transportation is -0.4, the authority should adopt a pricing policy that maximizes revenue. Inelastic demand suggests that a price increase will still generate additional revenue, as the decrease in quantity demanded will be proportionately smaller than the increase in price.

Therefore, the transportation authority should consider increasing the price per ride to maximize revenue and address its operating deficit.

(b) What price per ride must the public transportation authority charge to eliminate the deficit if it cannot reduce costs?

To determine the price per ride that would eliminate the operating deficit, we need to consider the current revenue, costs, and the price elasticity of demand.

Current revenue = Price per ride * Quantity demanded
Revenue = $1 * Quantity demanded

Current revenue = $100M
Operating costs = $120M
Price elasticity of demand (PED) = -0.4

We know that revenue is maximized when demand is unit elastic, i.e., when price elasticity of demand is -1.

Therefore, we can calculate the quantity demanded at the unit elastic demand by equating the revenue equation to the current revenue:

$1 * Quantity demanded = $100M

Quantity demanded = $100M / $1

Quantity demanded = 100 million rides

Now, we can find the new price that would generate enough revenue to cover the operating costs:

New revenue = New price per ride * Quantity demanded

Let's assume the new price per ride is P.

New revenue = P * 100 million rides

Operating deficit = Operating costs - New revenue

Since the operating deficit needs to be eliminated, we can set the operating deficit equal to zero:

Operating deficit = $0

Operating costs - (P * 100 million rides) = $0

$120M - (P * 100M) = $0

Solving for P:

P * 100M = $120M

P = $120M / 100M

P = $1.20

Therefore, if the transportation authority cannot reduce its costs, it must charge a price per ride of $1.20 to eliminate the operating deficit.