The Municipal Railway imposed a 67% fare increase on the cable car fare. Prices rose to $5 for cable cars while prices for fares on street cars raised $0.25 to $1.50. Demand for cable cars decreased after the price increase but revenue increased 23%. Cost to operate the cable cars is $312 and for the street cars is $188/hour. For diesel buses it is $121. What is the price elasticity of demand for a cable car ride? What should the company do: raise, lower or leave fares as is if their main goal is to reduce their $57 million operating deficit? Explain how your recommendation will increase profits or lower operating losses.
The question belongs to Finance and it discusses about whether or not the company’s decision of increasing fares of cable cars is a good idea and its impact on operating deficit.
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