A newspaper reported that an increase in bus fare decreased the number of people travelling from Green Bus Metro. "There has been a 5 percent decline in Green Bus Metro ridership as the fare increased from Rs.50 to Rs.75."
a) Calculate the price elasticity of demand.
b) What is the effect of fare increase on Green Bus Metro revenue?
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Given:
Old fare = 50
New fare = 75
Percentage decline = 5%
To Find:
a) Price elasticity of demand.
b) The effect of fare increase on Green Bus Metro revenue
Solution:
a) Percentage change in price = 75 - 50/50 × 100
25/50 × 100
= 50%
Elasticity of demand = % Change in quantity/ % change in price
= 5/50
= 0.1
The price elasticity of demand is 0.1
b) When the fares increase, the impact will be directly felt and the customers will be confused. The rise in fares may result in the costs for customers considering different modes to compare the prices.
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