The Marquee Theater is the only movie theater in Whitefish, Montana

a) The manager wants to raise prices till they make enough profit. This strategy is not sound. Even though a monopoly has market power in pricing, the demand for its product is still elastic. This means as price goes up, market demand will drop. This will have a negative impact on revenues and profits. If the revenue drop is significant, the business may never turn profitable.

b) Market power can be measured using Lerner Index as follows

Lerner Index = (P-MC)/P

where P is the price and MC is the marginal cost.

P - MC is called the markup

As market power of a monopoly increases, it can charge higher and higher prices. At very high prices, Lerner Index approaches a value of 1.

c) The manager should consider all options to improve profitability including pricing changes and cost reduction. In pricing, the manager should consider raising or lowering prices by taking into account the demand elasticity. Pricing should be set at a level where marginal cost equals marginal revenue which will be lower than ticket prices. Also, the manager should explore price discrimination strategies where different prices are charged based on willingness to pay depending on certain demographic characteristics such as student status or senior citizens or depending on time of the show. Price discrimination can help boost revenues without losing customers. The manager should also work on reducing fixed costs to improve profitability.