Question: Demand Elasticity and Profit Maximization

In the late 1950s and early 1960s, a bus line operating in Orange County, California,

provided cheap transportation to the beach during the summer months. The South Coast Transit Company took over the route from the original operators, but it soon went out of business. The following story ran in the Los Angeles Times, October 19, 1971:

The South Coast Transit Co. plans to abandon its daily bus

service to [the beach areas] .... [because] it sustained a

$3,000 loss during August [even though an official] said his

company received a rate increase from the Public Utilities

Commission last March, adding that while per passenger

revenues are up 20 percent over the previous period,

passenger loads are down 29 percent.

1. Estimate the price elasticity of demand for bus transportation to the beach. (Note

that because the changes described in the article took place over a relatively short period, it is probably safe to assume that other things remained unchanged as the price changed.)

b. Was the price change in the right direction? Why or why not? State your assumptions, if any.

c. Would a further increase in price make the situation better or

worse? Explain.

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