Answer

The price elasticity of demand between $0.40 per kilometer and $0.50 per kilometer is calculated by dividing the percentage change in quantity demand (2 / 4 x 100 = 50%) by the percentage change in price (10 / 50 x 100 = 20%). The price elasticity of demand is therefore 2.5. This indicates that the demand is relatively elastic, meaning that the company would experience a larger decrease in demand compared to the increase in price.

The price elasticity of demand between $0.50 per kilometer and $0.60 per kilometer is calculated by dividing the percentage change in quantity demand (1 / 4 x 100 = 25%) by the percentage change in price (10 / 60 x 100 = 16.67%). The price elasticity of demand is therefore 1.5. This indicates that the demand is relatively inelastic, meaning that the company would experience a smaller decrease in demand compared to the increase in price.

Analysis of Elasticity of Demand

Elasticity of demand is an important factor for the local bus company to consider when deciding on the fare price. If the demand is elastic, it means that customers are more sensitive to changes in price and the local bus company may experience a larger decrease in demand compared to the increase in price. On the other hand, if the demand is inelastic, it means that customers are less sensitive to changes in price and the local bus company may experience a smaller decrease in demand compared to the increase in price.

Recommendation

Based on the price elasticity of demand between $0.40 per kilometer and $0.50 per kilometer, and between $0.50 per kilometer and $0.60 per kilometer, the local bus company should consider increasing the fare price to $0.60 per kilometer. This is because the demand is relatively inelastic at this price, meaning that the company would experience a smaller decrease in demand compared to the increase in price.

Related Questions

  • What is the difference between elastic and inelastic demand?
  • What other factors should the local bus company consider when deciding on the fare price?
  • What is the difference between price elasticity of demand and price elasticity of supply?
  • What is the formula for calculating price elasticity of demand?
  • How can the local bus company increase passenger demand?
  • What is the difference between the short run and the long run elasticity of demand?
  • What are the different types of elasticity of demand?
  • How does the local bus company calculate total cost?
  • What is the purpose of conducting a survey to estimate passenger demand?
  • How does the local bus company benefit from knowing the price elasticity of demand?