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

question 159

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. 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?
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:

Activity-Based Costing

An approach in cost calculation that pinpoints various activities in a company and apportions the expenses of these activities to products and services, reflective of their actual utilization levels.

Direct Labor-Hours

The total hours of labor directly involved in the manufacturing process, crucial for calculating labor costs and production efficiency.

Direct Materials Cost

The cost of raw materials that can be directly attributed to the production of goods.

Activity-Based Costing

A costing methodology that assigns overhead and indirect costs to specific products or projects based on their consumption of resources.