Case ExampleDelhi MetroCase ProblemMD of Delhi Metro worried as
Projected revenues were Rs 674.5 million below the projected costs
for next yearRs 200 million promise from StateA shortfall of Rs
474.5 millionAnother possible source of fund City funds Delhi,
Noida and Gurgaon- But unlikely due to problems in city BudgetHow
to solve his pending budget crisis?
Case Problem (continue)Mr. Sreedharan glanced through a Business
magazine while his thoughts travel in the direction of solving the
budgetSuddenly his eyes fell on the article The Journey to Work in
the Metropolitan AreaHe noticed the followingShort run fare
elasticity -0.3Long run fare elasticity -1.1Facts and
figuresCurrent daily ridership of Delhi Metro is 0.8 million at
average current fare of Rs15 per rideA linear approximation can be
made for Delhi Metro according to MD. In the short run most costs
would be fixed, that does not vary with ridershipVariable
operational costs would change slightly with change in ridership
and can be ignored.Facts and figuresThus if his budget problems to
be solved the solution must come revenue sideMD immediately calls
his immediate manager Mr. Nair and asks What does the study in this
Business Magazine tell us about the demand for our services and can
we use the information in there to help us balance our budget?
Can you help out Mr. Nair ?What is the short run daily demand
curve for transit given the information from the Business Magazine
and Delhi Metro?What short run strategy (in general and
specifically) would you come up with given this demand curve and
the pending budget needs of the Delhi Metro system? Can you help
out Mr. Nair ?Will this same type of strategy work in the long run?
Specifically why or why not? What should the MD do? What may be the
likely reasons for the difference in price elasticities between
long run and short run?More researchMr. Nair had also discovered
that the Research organization who came up with the article, also
made an advanced study of elasticity with respect to Delhi Metro
Travel Time. The short run elasticity travel time is -0.7, while
long run travel time is 1.6. Nair knows that it costs the same
amount to implement the fare increase (new settings of the fare
machines, etc.) as it would cost to bring about a 1% lowering of
transit times (by speeding up vehicles, etc)Can you help Nair?If
you could only do one of the above in the short run (raise fares by
1% or lower travel time by 1%), what would you do? Why?Some more
research Urban/Suburban differences exist in the fare and time
elasticities. The suburbanites have more elastic fare elasticities
and more elastic travel time elasticities than the urbanites. In
addition the income elasticity of demand for transit is negative
for the whole greater Delhi Region.Why is there a difference in
fare and travel elasticities?What does the income elasticity tell
you?
