As a manager of a chain of movie theaters that are monopolies in their respectiv

Question

As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that has revealed two different demand curves at your movie theaters. On weekends, the inverse demand function is P = 20 – 0.001Q; on weekdays, it is P = 15 – 0.002Q. You acquire legal rights from movie producers to show their films at a cost of $25,000 per movie, plus a $2.50 “royalty” for each moviegoer entering your theaters (the average moviegoer in your market watches a movie only once).

What type of pricing strategy should you consider in this case?

First degree price discrimination

Block pricing

Third degree price discrimination

Second degree price discrimination

What price should you charge on weekends?

Instruction: Enter your response rounded to two decimal places.

$  

What price should you charge on weekdays?

Instruction: Enter your response rounded to two decimal places.

$

Explanation / Answer

1) Third degree price discrimination should be consider for this case as monopolist charging different price for different consumers groups, i.e., different price for consumers coming on weekdays and different price for consumers coming on weekends.

Total cost = Fixed cost + variable cost

Total cost (C) = 25000 + 2.50Q

inverse demand function for weekends:

P = 20 – 0.001Q

inverse demand function for weekdays:

P = 15 – 0.002Q

for weekends:

profit = revenue - cost

profit = P*Q - C

profit = (20 – 0.001Q)Q - 25000 + 2.50Q

for maximisation:

MR = MC

MR = d(Revenue)/dQ

MR = d(20Q - 0.001Q2)/dQ

MR = 20 - 0.002Q

MC = 2.50

MR = MC

20 - 0.002Q = 2.50

Q = 8750

P = 20 – 0.001Q

P = 20 – 0.001*8750

P = $11.25

For weekdays:

for maximisation

MR = MC

MC = 2.50

revenue = P*Q

revenue = (15 – 0.002Q)Q

revenue = 15Q - 0.002Q2

MR = d(revenue)/dQ

MR = 15 - 0.004Q

MR = MC

15 - 0.004Q = 2.50

Q = 3125

P = 15 – 0.002Q

P = 15 - 0.002*3125

P = $8.75

2) What price should you charge on weekends?

ans: $11.25

3)What price should you charge on weekdays?

ans: $8.75

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