economic homework

Homework

Question:The economy is heading into a recession and the company is running at a loss. the rail fares is increasing. How do you use the information below to inform your decision on price?Do you rise or lower price?
1)Price elasticity of demand: -1.58explain:Because the PED is -1.58, we can know that the demand is elastic but the demand and price are not changing in the same direction..It means that when the price of bus goes up, the quantity demanded will go down at a big scale. Therefore,on the contrary, if we want to increase the demand we should lower the price .It is better to lower the price in my opinion.
2)Income elastic of demand: -2.43explain: Because of the negative YED which is estimated as -2.43, we can know that the demand is elastic which means that demand falls as income rises. So we can conclude that taking a bus isinferior. Therefore, the company should lower the price.
3)Cross elasticity of demand: 2.21explain: Because the XED is greater than 1, we can know that the two goods are substitues which means that the quantity demanded of taking a bus goes up with the increasing price of rail fares and they have close relationgship. Therefore, the company need to drop the price.
4)Price elasticity of supply: 1.15explain: Because the PES is greater than 1, the price of bus is elastic which means that the quantity supplied goes up along with the increasing price of taking bus. In conclusion, it is betterfor the company to rise the price.


Mr Chris I am so sorry I just write this today , and Daisy teachs me about this.






copy from Chris's blog


First of all, notice that your company is making a loss, so you need to take some action.The first piece of information you look at is the price elasticity of demand, where yousee that you face elastic demand, with the price elasticity being –1.58. So if you were to increase your fares by 10% (and if your company faced the same elasticity as theaverage for the market), you would expect to see a fall in demand of 15.8%, and a fall in revenues. On the other hand, if you were to reduce your fares by 10%, revenue would increase following a 15.8% increase in demand.
However, you need to be aware of market conditions. The economy is heading into a recession, and you are faced with an income elasticity of demand that is strongly negative (–2.43). In other words, bus travel is an inferior good. This is good news for you as it means that, as incomes fall in the recession, more people will use the buses, and you will enjoy an increase in demand.
Whether the cross-price elasticity will be helpful to you depends on what is happening in the market for rail travel. If you happen to know that rail fares are about to increase, then again this is good news for you, as bus travel is a strong substitute for rail travel.
For a 10% increase in train fares, there will be a 32.1% increase in the demand for bus travel. These elasticities thus help you to make a reasoned decision on pricing, depending on what is happening in the economy as a whole, and in the markets for close substitutes such as rail travel. The price elasticity of supply is less helpful to you. It tells you how you would respond to a change in price — but you probably know that anyway.