The following equation represents the weekly demand that a local theater faces.

ID: 1188165 • Letter: T

Question

Qd = 2000 - 25 P + 2 A,

where P represents price and A is the number of weekly advertisements.

Presently the theater advertises 125 times per week. Assuming this is the only theater in town, and its marginal cost, MC, is equal to zero,

a. Determine the profit maximizing ticket price for the theater.

b. What is the price elasticity of its demand at this price?

c. What is the elasticity of its demand with respect to advertising?

d. Now suppose the theater increases the number of its ads to 250. Should the theater increase its price following this ad campaign? Explain.

a. profit is maximum where marginal benefit is eqyual to marginal cost

marginal benefit = 2000-50P +2A = 0=> 50P = 2000+2*125 = 2250 => P = 45

profit maximizing ticket price is 50

b. price elasticity of demand is -25

c. 2

d. if number of add increases to 250 , then price at maximum profit is 50

so the theatre increase its price following add campaign

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