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# Microeconomics question?

Sun 1 Jun, 2014 03:59 am
So I have a task that has been puzzling me for quite a while.The mayor of a local city want to make the subway tickets cost 1 dollar instead of 1.50 dollars,but he is worried that if he lowers down the prices,he will go bankrupt,the financial advisor says that such a thing wont happen,and the question is why?Why lowering down the prices of a certain thing does not necessary mean lowering down income and going bankrupt?I am really curious why and I want to know
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markr

1
Mon 2 Jun, 2014 12:41 am
@bambam9,
Let's say there's a fixed cost to operate the subway - whether it's full or empty.
Let's also say that, on average, it's currently only half full at the \$1.50 fare.
If lowering the fare to \$1.00 will fill the subway, then revenue increases by 33%.

Generally, lowering the cost of something results in more sales. The question usually is, do sales increase enough increase profit?
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cicerone imposter

1
Wed 4 Jun, 2014 01:17 pm
@bambam9,
Because more people will choose to ride the public transportation at lower cost.

Some one must have done the survey to see how many more passengers they'll get from the lowered price. It seems reasonable to increase the demand by lowering the price, but with much higher volumes.

The break even point is 50% more ridership. If they have 10,000 riders at \$1.50 (\$15,000 gross revenue), they'll need 15,000 riders to break even at \$1. The likelihood that it'll increase by 50% is the issue. If they increase ridership by 51%, their net income increases by \$150. If ridership increases by 60% (or 10% more than break even), their revenue increases by \$15,000.

This only looks at the revenue side, but the company must also consider any added cost.
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