Answer to Question #122658 in Microeconomics for Brenda Formin

Question

1. The owner of a health club asks you for advice about whether the company should raise the price of its membership this year based on the following information: last year the club raised the price of its membership by 5% and the number of members paying the same fee fell by 7%.


2. The Metropolitan Transit System recently announced a 50% increase in the price of a transit ticket. The administrators said that they needed an increase in revenue to cover their rising costs. Explain the economic rationale for this decision.

Answer 1

1.

The formula for the price elasticity of demand indicates the demand for memberships is price elastic or 1.4 in this case (7 divided by 5). This result suggests that total revenues for the club should have decreased last year. Another increase in price this year would only decrease total revenues. You should advise the owner to lower membership prices because it should increase total revenue given that the membership price is in the elastic range.

2.

The purpose of the administrator helps the organization in increasing the revenue that is used for increasing the cost of a product. Due to the elasticity of demand as the price of the transit ticket revenue is increased it is expected that the demand will not change as demand is considered inelastic.