The Mass Rapid Transit (MRT)System in Hong Kong Has Been

question 240

Essay

The Mass Rapid Transit (MRT)System in Hong Kong has been running significant losses.Transport Ministry officials have argued over whether to raise fares to combat the losses.One argument against a fare increase is that it will aggravate traffic congestion on the streets during peak commuter hours.Suppose that the current fare is $4 and the government is considering raising it to $6.Officials estimate that this reduces the number of rides purchased from 10,000 to 8,000 per day.
a.Using the midpoint formula, what is the estimated elasticity of demand for MRT rides?
b.What does this elasticity of demand suggest to you about what will happen to total revenue earned by the transit system if the fare increase happens?
c.Last year, the MRT system incurred a loss of $50,000 per day.Do you think the fare increase will resolve the deficit problem as well as Ministry officials anticipate? Explain.

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Definitions:

Volume

The quantity or amount of something, often used in context with sales volume or production volume.

Variable Cost

Expenses that change in proportion to the activity of a business, such as costs for raw materials, packaging, or labor directly associated with product manufacturing.

Activity Levels

The amount of effort or capacity utilized in the operations of a business, which can influence cost and operational efficiency.

Bonds Issued

The process of a corporation or government raising funds by selling bonds to investors.