If the capacity of the bus system is 5000 passengers, what should the bus system charge to produce the largest possible revenue in the following case:
A city bus system carries 4000 passengers a day throughout a large city. The cost to ride the bus is $1.50/person. The owner realizes that 100 fewer people would ride the bus for each $0.25 increase in fare, and 100 more people would ride for each $0.25 decrease in fare.
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With a fare of $1.5 there are 4000 passengers of the bus service.
A $0.25 increase in fare decreases the number of passengers by 100 and a $0.25 decrease in fare increases the number of passengers by 100.
For a change in the fare of x, the total revenue
R = (4000 - 100*x)(1.5 + x*0.25)
=> 6000 - 150x + 1000x - 25x^2
To maximize R, solve R' = 0
R' = -150 + 1000 - 50x
-150 + 1000 - 50x = 0
=> 50x = 850
=> x = 17
The price of ticket should be increased by $4.25 to $5.75
Revenue is maximized when the fare is increased to $5.75.
I do not think it is the right way to approach this question :( So far I have worked this
I don't know what to do after this. Anyone would like to help me please, I have a test tomorrow and my teacher said questions like this will be on the test.
Ok, begin by calculating how much the bus system makes each day. 4000x$1.50=$6000
Now, think about how much the 100 fewer people would cost the company.
3900x$1.50=$5850, which is a 150 dollar decrease
And the company would make $.25 more per passenger so...
Then calculate the same thing for the other scenario.
As you can see, the $.25 increase is better for the company in the long run. So the bus system should charge $1.75 for bus fare to make the largest possible revenue.
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