Question

You are the pricing manager for a bus tour company which sells tickets to tourists for bus tours of major cities. The current price for a bus tour is $10 per ticket. On average, you sell 10,000 tickets per month. You are contemplating raising the price for a ticket to $12 per ticket. You estimate that the number of tickets sold will fall to 9,000 tickets per month. Your variable costs are $3 per ticket. Your fixed costs are $50,000 each month. If your goal is to maximize profits, should you raise the price of tickets to $12? Explain your answer.

Answer 1

Correction please

Price	Q	VC=3*Q	FC	TC=VC+FC	P	TR	Profit	Ed
10	10000	30000	50000	80000	10	100000	20000
12	9000	27000	50000	77000	12	108000	31000	-0.5

Yes. The price needs to be increased. From the above table we can observe that when price is increased from 10 to 12 the profit increases. This could be referred as inelastic good as the elasticity value is 0.5 which is less than 1, so for an inelastic good any increase in price would not reduce quantity much thereby increases the profit. So, the price needs to be increased.

Elasticity = %change in Q/%change in price

=((9000-10000)/10000)/((12-10)/10)

=-0.5