2.

September 2016/17

A bus company increased the bus fare from RM1.50 to RM2.50. After the fare increased, it
was reported that the number of passengers taking their buses declined from 100 million to
96 million.

(i) Calculate the bus fare price elasticity of demand. (4 marks)

Ed = Percentage change in quantity demanded (%∆Qd)

Percentage change in price (%∆P)

∆ Qd
=
Qd Average

∆P
P Average

96 million−100 million
=
98 million

RM 2.50−RM 1.50
RM 2

−4 million
=
98 million

RM 1
RM 2

= -0.082

= 0.082

(ii) Interpret the answer in part (i). (2 marks)

Percentage change in quantity demanded is less than percentage change in price with the
value is 0.082, which is inelastic.

(iii) Examine the decision to increase the price of bus fare in terms of its effect on
total revenue and profits, assuming costs are unchanged. (3 marks)

As the diagram shows, two points on a demand curve. At point A, price is RM2.50
and quantity demanded is 96 million. At points B, price is RM1.50 and quantity demanded is
100 million.

When the price of bus fare increased, it caused the number of passengers will decrease.
Hence, the price elasticity of demand curve

 Demand is inelastic between points A and B.

 A rise in price, from P₂ to P₁, will increase the size of the total revenue rectangle
from 0P₂BQ₂ to 0P₁AQ₁.
  In other words, when demand is inelastic, price and total revenue are directly related.

Total Revenue (TR) = price of a good x quantity of the good sold

Total Revenue before adjusted = RM1.50 x 100 million

= RM 150 million

Total Revenue after adjusted = RM2.50 x 96 million

= RM240 million

Total Revenue increases RM90 million

Price (RM)

(RM2.50) P2 A

(RM1.50) P1 B

Quantity
0 Demanded (million)
Q2 Q1

(96 million) (100 million)