Consider the foWlowing scenario to answer the following questions: EjH Cinemas,

Question

Consider the foWlowing scenario to answer the following questions: EjH Cinemas, a movie theater next to your university, attrocts two types of customers- those who are assoclated With the university (students, faculty, and staff) and locals who Wve in the surrounding area. There are 10,000 universiny customers interested in purchasing movie tickets from EH Cinemas, with a maximum willingness to pay of $7 per ticket. There are 20,000 local customers interested in purchasing tickets, with a maximum wallingness to pay of $9 per ticket. The movie theater incurs a constant marginal cost of $4 per ticket. For simplicity assume each customer purchases, at most, one ticket What is the amount of consumer surplus if the price is $7 per ticket?

Explanation / Answer

1. Consumer surplus is the difference between total money that consumers are willing to pay ( $9 and $7 in our case ) and and the amount they need to pay ($7 in our case).

2. The University staff will be having no consumer surplus because they are willing to pay the same amount which Cinema is charging ($7) so they will have no consumer surplus.

3. The Local consumers will have a surplus of $2 on each ticket because they are willing to pay $9 while Cinema is chrging only $7 as ticket price. So, we can conclude that each consumer is saving $2 on his ticket.

4. Total consumer surplus will be 20,000*2 = $40,000.

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