Page 7 - CIMA May 18 - MCS Day 1 Suggested Solution

SUGGESTED SOLUTIONS

cash more quickly than if customers paid at the time of travel. Menta’s recent investment in IT
may also allow it to use the pattern of season ticket purchase to help with its scheduling and the
sizes of bus it allocates to routes. Menta must feel that the benefits in cash flow and customer
information outweigh the loss of the discount given to customers.

Menta may also find that some customers who pay for a week’s or month’s pass end up taking
fewer journeys than they have paid for. For instance, a customer who pays for a month’s ticket to
cover their commute who is then ill for a week of the month may end up paying more for the
period than if they’d paid an individual fare for each journey they actually took, which would work
to Menta’s benefit.

The price elasticity of demand for individual journeys will be variable. Some people rely on bus
services and so the elasticity of demand for them will be low – they have to take the journey even
if the price rises.

For the season tickets, popular with commuters, people will need to make the journey to get to
work, so elasticity of demand may be low within a certain range of prices, but at a stage where
the price of bus fares rises to a high level, people may feel that it is as cost effective to use
another method of journeying to work, such as car travel. At this price the elasticity of the fares
will rise, becoming more elastic.

Concessions to elderly or disabled

Menta offers lower prices to the elderly and disabled. This would be seen as a form of price
differentiation, encouraging those who wouldn’t otherwise be able to travel to do so. However,
Menta does this because the concession originates from the government and Menta themselves
invoice the government for the concessions, so are effectively receiving the same or nearly the
same price.

From the customer point of view, the elasticity of demand will be high – they may only be able to
afford the bus travel due to the low prices.

Competition pricing with Dawlbus

With its main competitor in Centralia, Dawlbus, Menta matches its competitor’s prices to within a
few cents.

It is likely that the price elasticity of demand is relatively high here, but if Menta were to
significantly undercut Dawlbus to try and gain market share, this could lead to a price war where
both companies keep reducing prices to a stage where they are barely making profits on the
routes, leading to neither company being better off.

Rural and city fares

These fares are generally priced so that buses don’t reach break‐even with average loads. Profit is
made from the peak hours when loads are higher than average.

Demand for these routes is fairly elastic in general, with even small price differences affecting
those who travel regularly.

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