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<p>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).</p>

<p>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.</p>

<h4>Passengers</h4>

<p>Surveys
have shown that passengers on service 1 behave differently to those
on service 2 as shown below:</p>

<table class="table">
    <thead>
    <tr>
        <th></th>
        <th>Service 1</th>
        <th>Service 2</th>
    </tr>
    </thead>
    <tbody>
    <tr>
        <th scope="row">Elasticity with respect to fares</th>
        <td>-0.4</td>
        <td>-0.2</td>
    </tr>
    <tr>
        <th scope="row">Elasticity with respect to mileage</th>
        <td>+0.4</td>
        <td>+0.6</td>
    </tr>
    </tbody>
</table>

<p>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.</p>

<p>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).</p>

<h4>Costs</h4>

<p>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.</p>

<h4>Revenue</h4>

<p>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.</p>

<p>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.</p>

<p>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.</p>