Answer to Question #42734 in Microeconomics for Kia

Question

Coconut Airways is suffering from low revenues and inadequate profits. The managing director reports the following facts about the company's performance for the month.

Average fare: $100

Number of passengers: 2000

Price elasticity: -1.5

The company is proposing a fare increase to $110. Should the company go ahead with the increase? Explain.

Answer 1

Average fare: $100, number of passengers: 2000, Price elasticity: -1.5. The company is proposing a fare increase to $110. As the price elasticity is -1.5, demand is elastic, so the increase in price will tend to decrease in total revenue, so the company shouldn't go ahead with the increase