Case Example

Delhi Metro
Case Problem
MD of Delhi Metro worried as Projected
revenues were Rs 674.5 million below the
projected costs for next year
Rs 200 million promise from State
A shortfall of Rs 474.5 million
Another possible source of fund City funds
Delhi, Noida and Gurgaon- But unlikely due to
problems in city Budget
How 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 budget
Suddenly his eyes fell on the article The
Journey to Work in the Metropolitan Area
He noticed the following
Short run fare elasticity -0.3
Long run fare elasticity -1.1
Facts and figures
Current daily ridership of Delhi Metro is 0.8
million at average current fare of Rs15 per ride
A 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 ridership
Variable operational costs would change
slightly with change in ridership and can be
ignored.
Facts and figures
Thus if his budget problems to be solved the
solution must come revenue side
MD 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 research
Mr. 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?