ALIYU OBABIOLORUNKOSI GAFAAR

UNIVERSITY OF LAGOS BUSINESS SCHOOL

EXECUTIVE MBA PROGRAMME
THIRD SEMESTER, 2022/2023 SESSION

MANAGERIAL ECONOMICS (EMB 833)

ASSIGNMENT 2

Assignment Questions:

1. Do you have enough information to determine

whether the demand for commuter rail service
in the B&M service area was elastic?
2. How do you account for the difference in
elasticity among the various lines? What reason
do you assign for the results on the Bedford and
Hudson branches?
3. Present detailed calculations for each line and
branch.
4. The B&M decided to continue with its petition
to end commuter service after these experiments
were finished. Why do you think the railroad
management made this decision?

FACILITATOR: PROF. N. I. NWOKOMA

DISCUSSION QUESTION 1:

Do you have enough information to determine whether the

demand for commuter rail service in the B&M service area was
elastic?

Yes, we do have sufficient information to calculate the own-price

elasticity of demand for commuter rail service in the B&M service
areas even though the change in demand quantity (Percentage change
in the number of commuters using the service after price change) will
have to be derived, as explained below.

Elasticity of demand is a measurement of the change in quantity

demanded in response to a change in price. The elasticity of demand
for any good or service depends on various factors such as price
changes, availability of substitutes, income levels, and consumer
preferences.

In this case study, we have detailed information about percentage

price changes in fares as well as the resultant total commuter revenue
arising therefrom as well as the prior year’s full fare total revenues for
the B&M Lines. The percentage change in the number of passenger
traffic was not provided in the case study.

We can however derive a working model of the percentage increase in

passenger traffic by reflating the 1963 total commuter revenue for
each Line by the estimated fare discount for each and then divide the
reflated amount by the 1962 total commuter revenue for each Line in
order to derive the percentage increase in commuter traffic
(percentage change in demand) for use in the calculation of the
elasticity for each Line.
DISCUSSION QUESTION 2:

How do you account for the difference in elasticity

among the various lines? What reason do you assign
for the results on the Bedford and Hudson
branches?

To answer this question, we need to examine the calculated own-price

elasticity of demand for the various lines. Based on the detailed
calculations in Question 3 below, we have the elasticity for each line
and branch which is separated into weekdays and weekends.

For weekdays, the own-price elasticity of demand per line is as

follows:
1. Eastern 1.76
2. Reading 1.31
3. Western 0.73
4. Lowell 1.93
5. Woburn 1.47
6. Fitchburg 2.00
7. Bedford & Hudson 0.46

And the own-price elasticity per line for weekends is as follows:

 Eastern 2.08
 Reading 1.59
 Western 0.73
 Lowell 1.85
 Woburn 1.60
 Fitchburg 2.86
 Bedford & Hudson No commuter train service
Fitchburg, Lowell, Eastern, Woburn and Reading in that order
showed that the demand for commuter service in those areas are price
elastic both during weekdays and weekends.

Conversely, Western and Bedford & Hudson were price inelastic for
both periods.

This shows us that for Western and Bedford & Hudson commuters,
train travel is either an essential commodity or there isn’t enough
service supply to meet their additional demand after the fare reduction
or the train fare is a very small proportion of their incomes or there is
no viable substitute to the commuter train as a means of travel or any
combination of the above factors.
DISCUSSION QUESTION 3:

Present detailed calculations for each line and

branch.

Please find in the sheet below, the detailed calculations for each Line
used to derive the percentage change in the commuter traffic numbers
over the two years (1962 and 1963) and the calculation therefrom of
the own-price elasticity attached to each line and branch.

Based on the calculations, the elasticity for each line and branch is
separated into weekdays and weekends.

In summary,

For weekdays, the own-price elasticity per line is as follows:

1. Eastern 1.76
2. Reading 1.31
3. Western 0.73
4. Lowell 1.93
5. Woburn 1.47
6. Fitchburg 2.00
7. Bedford & Hudson 0.46

And the own-price elasticity per line for weekends is as follows:

 Eastern 2.08
 Reading 1.59
 Western 0.73
 Lowell 1.85
 Woburn 1.60
 Fitchburg 2.86
 Bedford & Hudson No commuter train service
 BOSTON & MAINE RAILROAD
DETAILED CALCULATIONS OF CASE STUDY PRICE ELASTICITY (WITH ASSUMPTIONS)

i) CALCULATION OF AVERAGE FARE REDUCTION PERCENTAGE PER LINE

(a) (b) (c )
LINE 20-RIDE ONE-WAY SIMPLE AVERAGE
TICKET TICKET OF (a) & (b)
Eastern 29 36 32.5
Reading 22 27 24.5
Western 32 37 34.5
Lowell 31 30 30.5
Woburn 21 30 25.5
Fitchburg 30 39 34.5
Bedford & Hudson 27 33 30

Assumptions:
ai) In the calclulation of the average percentage fare discount from the 1962 fare per Line, we assume a 50:50
distribution between the 20-ride tickets and the one-way tickets on all Lines

aii) Bedford and Hudson Lines' figures were summed up and averaged in line with ia) above

ii) CALCULATION OF THE 1963 REVENUES ADJUSTED FOR THE FARE DISCOUNTS PER LINE

iia) WEEKDAYS

LINE 1963 FARE 1963 ADJUSTED

REVENUES DISCOUNT RATE REVENUE
USD % USD
Eastern 522.4 32.5 773.9
Reading 401.8 24.5 532.2
Western 234.4 34.5 357.9
Lowell 205.7 30.5 296
Woburn 161.1 25.5 216.2
Fitchburg 212.2 34.5 324
Bedford & Hudson 39.3 30 56.14

iib) WEEKENDS

LINE 1963 FARE 1963 ADJUSTED

REVENUES DISCOUNT RATE REVENUE
USD % USD
Eastern 68.8 32.5 101.9
Reading 26.1 24.5 34.57
Western 44.5 34.5 67.94
Lowell 32.2 30.5 46.33
Woburn 15 25.5 20.13
Fitchburg 31.1 34.5 47.48
Bedford & Hudson 0 30 0

iii) CALCULATIONS OF THE ESTIMATED COMMUTER TRAFFIC PERCENTAGE CHANGE PER LINE AFTER FARE DISCOUNT

iiia) WEEKDAYS

LINE 1963 ADJUSTED 1962 CHANGE IN

REVENUES REVENUES COMMUTER TRAFFIC
USD USD %
Eastern 773.9 492.3 57.21
Reading 532.2 403 32.06
Western 357.9 285.5 25.35
Lowell 296 186.4 58.78
Woburn 216.2 157.3 37.47
Fitchburg 324 191.8 68.91
Bedford & Hudson 56.14 49.3 13.88

iiib) WEEKENDS

LINE 1963 ADJUSTED 1962 CHANGE IN

REVENUES REVENUES COMMUTER TRAFFIC
USD USD %
Eastern 101.9 60.8 67.64
Reading 34.57 24.9 38.83
Western 67.94 54.3 25.12
Lowell 46.33 29.6 56.52
Woburn 20.13 14.3 40.8
Fitchburg 47.48 23.9 98.66
Bedford & Hudson 0 0 0

iv) CALCULATIONS OF PRICE ELASTICITY PER LINE

iva) WEEKDAYS

LINE SIMPLE AVERAGE CHANGE IN PRICE

FARE DISCOUNT COMMUTER TRAFFIC
ELASTICITY
% %
Eastern 32.5 57.21 1.76
Reading 24.5 32.06 1.308
Western 34.5 25.35 0.735
Lowell 30.5 58.78 1.927
Woburn 25.5 37.47 1.469
Fitchburg 34.5 68.91 1.997
Bedford & Hudson 30 13.88 0.463

ivb) WEEKENDS

LINE SIMPLE AVERAGE CHANGE IN PRICE

FARE DISCOUNT COMMUTER TRAFFIC
ELASTICITY
% %
Eastern 32.5 67.64 2.081
Reading 24.5 38.83 1.585
Western 34.5 25.12 0.728
Lowell 30.5 56.52 1.853
Woburn 25.5 40.8 1.6
Fitchburg 34.5 98.66 2.86
Bedford & Hudson 30 0 0
DISCUSSION QUESTION 4:

The B&M decided to continue with its petition to

end commuter service after these experiments were
finished. Why do you think the railroad
management made this decision?

There could be several reasons behind their decision.

One possible reason could be that the costs associated with providing
commuter rail service were too high compared to the revenue
generated. In other words, the B&M management concluded that the
commuter rail service was not financially viable. The revenues earned
figures in Table 3 of the case study provide pointers in this direction
as the overall financial impact of the significant average fare discount
(28%) was an insignificant 0.6% weekday and 1.1% weekend growth
in overall revenue. Furthermore, the revenue per individual line and
branch was a measly high of 10.6% growth in Fitchburg to a revenue
reduction of 20.3% in Bedford & Hudson on the weekdays. And the
weekend revenue figures were not much better with Fitchburg once
again being the top performer at 30.1% and Western returning a
negative revenue growth of 18%.

Additionally, they may have determined that the resources required to

maintain the commuter rail service could be better utilized in other
areas of their operations given the points made in the previous
paragraph.

Another possible reason could be that the experiments conducted did

not yield the expected results. Perhaps the Mass Transportation
Commission of Massachusetts and the B&M management had
anticipated that the experiments would show such an increased
demand for commuter rail service that revenues would go
dramatically despite the fare discounts, but instead, the results showed
that there was little to no change in revenue.
As a result, they may have concluded that continuing with commuter
rail service was not worth the effort.

In summary, the decision made by B&M management could have

been influenced by a combination of financial and operational
considerations, as well as the results of the experiments conducted.