The New York Times reported…
> Subway ridership declined by five (5) million fewer riders in December, 1995, the first full month after the price of the token increased by $.75 to $2.00 (+ 60%) than in the previous December. This resulted in a 15 % decline in riders.
Also, given the price increase ($1.25 to $2.00 or + $ .75), supply did not change !
> With this information, estimate the Price Elasticity of
> According to your analysis, what happens to the Transit Authority’s total revenue when the fare rises? Explain ?
> Why might your initial elasticity ("PED") calculation be unreliable?
> If your explicit total cost is $50 M (accounting costs) and $60 M economic costs, based on the token increase, are you now generating enough revenue to cover your operating costs?
> What is the Profit / Loss turnaround ? Interpret your results..
* Hint: Formulas to use are TR – TC = Profit;
* Accounting Profit or Loss = Total Revenue (P * Q) less Accounting Costs (Fixed + Variable);
* Economic Profit or Loss = Total Reveue (P*Q) less Economic Costs (Fixed, Variable +
* Note: Accounting Costs = Explicit = Fixed + Variable;
* Note: Economic Costs = Explicit + Variable + Opportunity Costs;
* Price Elasticity of Demand is = % Change in Quantity Demanded / % Change in Price....The absolute value = ( 15 % / 60 %)
* TR = Total Revenue (P * Q); Total Cost (Accounting) = Fixed + Variable = $50 M; Total Cost (Economic) = Fixed + Variable + Opportunity Cost = $ 60 M.
* Quantity Sold = Ridership PRIOR the token increase (@ $ 1.25) = 5 M / 15 % = 33.3 M;
* TR 1 = Price * Quantity Sold = $1.25 * 33.3M = $41.624 M
* Quantity Sold = Ridership AFTER the token increase (@ $ 2.00) = 5 M / 15% less 5 M = 33.3 M less 5 M loss = 28.3 M;
* TR2 = Price * Quantity Sold = $2.00 * 28.3 M = $56.6 M
* Note: With a + 60 % increase in price coupled with a - 15 % decline ridership, overall total revenue increased from $41.624 M to $56.6 M, or a + 36% increase in revenue.
* Why: "PED" is highly inelastic ! Price increased by + 60 % and demand (ridership) only declined by 15 %;
* "PED" = 15 % / 60 % = .25% < 1; For every 10 % change in price, quantity demanded declined by 2.5%;
* With a + 60 % change (increase) in price, quantity demanded representing a decline in ridership by - 15 % per the problem.
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* Now, change the parameters of this problem to include the following.....Note: Same time period (one month).
* Token price increases from $1.25 to $2.50: Ridership now declines to 25 % equivalent to 10 M less riders.......Assume costs (accounting) increase to $ 55 M and economic costs increase to $ 65 M; Supply increases by + 10%;
* What is your revised "PED" & "PES"?;
* What are your new profit & loss values based on evaluation of both accounting & economic costs ? Are you better or worse off ?
* What could happen if your analysis was extended from one (1) month to six (6) months ?
* What could happen if your market's (audience) average income increases or decreases by + / - 15 % given the change in the token cost from $1.25 to $2.50 ?
* Would your "PED" and "PES" and profit / loss values change as well ?
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