Suggested Answers of BT2 Revision Package - ASKnLearn

The producer can use the knowledge of PED for its good to reduce or increase the priceso as to increase its total revenue.Premier Taxis would be likely to have many competitors such as ComfortDelgro, CitiCab andSMRT who are close subsititutes. Hence, the demand for Premier taxis is price elastic.As such, the producer should lower its taxi fare. This will cause a more than proportionateincrease in quantity demanded, ceteris paribus. Thus total revenue increases assuming totalcost remains constant or increase in cost to a smaller extent, then its profits would rise.However, when Premier Taxis lower their price, its competitors would very likely follow suit andmay even lower their prices more. This would trigger a price war which could result in allproducers being worse off and only benefiting the consumers. Thus, price cuts may not alwaysbe a good strategy.In view of rising costs of fuel, costs of production have risen. Hence, for Premier Taxi, it not onlyneeds to consider strategies that increase its total revenue, there is also a need to considerstrategies to reduce costs as well. For example, the Premier Taxi can negotiate bulk discountfor entire taxi fleet for servicing, maintenance and fuel costs. However, the firm must increasetaxi fleet so as to increase EOS enjoyed.Perhaps, a better strategy is to increase its demand and/or to make the demand for hisproduct price inelastic by product differentiation and product development.Product differentiation includes using strategies like advertising, product branding, promotionslike giving free gifts etc. Product development involves using research and development andinnovation to improve on product design of taxis, either to improve comfort or facilities offered inthe cab; or to improve fuel efficiency of the taxi, hence lowering costs and consequently prices;or improving the quality of the services provided, such added convenience for customers:nets/credit card payment modes, to improve customer service of call service personnel andtaxi drivers through training like phone service etiquette, familiarity to routes, improvelanguage ability and promoting places of interests to foreign visitors, advertising/branding ofservice standards on fleet of well-maintain taxis, promptness of call service centre(hardware) and experience of taxi drivers (software) and to increase the source of revenueby selling advertisement spaces on taxis.