You are the financial director of the Domino Bus Company, which operates two services. Your problem is that every year your costs are increasing (at a rate of 1% per annum) and your passenger numbers are decreasing (also at a rate of 1% per annum).
At the beginning of each financial year you may alter the quality of service offered (equivalent to miles operated) and/or the fares charged on each service.
Surveys have shown that passengers on service 1 behave differently to those on service 2 as shown below:
|Elasticity with respect to fares
|Elasticity with respect to mileage
This means that on service 2, a 1% increase in fares will lead to a 0.2% loss of passengers, whereas a 1% decrease in mileage will lead to a 0.6% loss of passengers. On service 1 the effect will be a 0.4% loss of passengers for either a 1% increase in fares or a 1% decrease in mileage.
The passenger behaviour will, however, change as the nature of the services change: at higher fares the range of passenger loss increases (and vice versa); at lower mileage levels the rate of passenger loss also increases (and vice versa).
Most of the costs that you incur are directly related to the level of mileage run but there will always be a fixed overhead (initially 20% of costs) which will be unaffected by service changes.
Any profit you make in a single year will be carried forward to the following year (the balance), as will any loss. Profits in excess of 10 units in any one-year will attract the taxman’s attention: he will appropriate profit in excess of 10 units. A cumulative deficit, on the other hand, of more than 50 units will cause you to be declared bankrupt.
At the beginning of the game your costs and revenue balance exactly: you are operating equal mileage on both services (100 mileage units on each); you have 150 passenger units on service 1 and 100 on service 2.
You must decide what management action to take at the beginning of each year, in order to continue running a good bus service. If you do nothing you will be bankrupt within four years.