Your good friend owns a small town movie theatre. She currently charges $5 per t
ID: 1094633 • Letter: Y
Question
Your good friend owns a small town movie theatre. She currently charges $5 per ticket for everyone who comes to the movies. Given the demand curves shown, answer the following questions:
a. What is your current total revenue for both groups?
b. Just by looking at the graphs (no calculations) decide which market has more elastic demand than the other. How can you tell?
c. Calculate the following point price elasticities of demand: Adult Demand at $8, $5 and $2 Child Demand at $6, $5 and $2
d. Given the graphs and what you know about economics, what do you recommend that your friend charge for an adult ticket and for a child ticket? How much could your friend increase total revenue if she takes your advice?
Your good friend owns a small town movie theatre. She currently charges $5 per ticket for everyone who comes to the movies. Given the demand curves shown, answer the following questions: a. What is your current total revenue for both groups? b. Just by looking at the graphs (no calculations) decide which market has more elastic demand than the other. How can you tell? c. Calculate the following point price elasticities of demand: Adult Demand at $8, $5 and $2 Child Demand at $6, $5 and $2 d. Given the graphs and what you know about economics, what do you recommend that your friend charge for an adult ticket and for a child ticket? How much could your friend increase total revenue if she takes your advice?Explanation / Answer
Price elasticity of demand, or sometimes plainly called the price elasticity, measures the responsiveness of a quantity demanded as a result of changes in prices. Price elasticity as well tells us what ensues to total revenue when prices : either the quantity effect or the price effect is stronger, determined by its size. The formula for determining the price elasticity of demand is:
PEoD = (% Change in Quantity Demanded)/ (% Change in Price)
Or n= (Q1-Q0) / (Q1+Q0)
(P1-P0) / (P1+P0)
The price elasticity of demand in the adult market is,
(40-50) / (40+50)
(8-5) / (8+5)
= (-10/90) / (3/13)
= -0.1111 / 0.2307
= -0.4811
= 48.11%
The price elasticity of demand is inelastic since it is less than one and the demand is not sensitive to price changes (Hall & Lieberman, 2013). The lower the price elasticity of demand, it implies that changes in price have little influence on demand.
The price elasticity of demand for the child market is
(20-50) / (20+50)
(5-2) / (5+2)
= (-30/ 70) / (3/ 7)
= (- 0.42857) / (0.42857)
= -1
=100%
The price elasticity in the child market is elastic, since it is greater than one which means that the demand is sensitive to changes in price (Cordes, 2005). In addition, the higher the price elasticity, the more sensitive the consumers are to price changes.
For the adult ticket, he should increase the total price as it would lead to an increase in total revenue. In this case, the price effect is stronger than the quantity effect hence an increase in the price leads to an increase in the total revenue.
For the child ticket, he should increase the quantity of the tickets supplied since the price effect is weaker. The quantity effect lead dominates the price effect; hence a decrease in the price level will lead to an increase in the total revenue.
References
Cordes, J. J. (2005). The encyclopedia of taxation & tax policy. Washington, D.C: Urban Institute Press.
Hall, R. E., & Lieberman, M. (2013). Economics: Principles & applications. Australia: South Western Cengage Learning.
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