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You own a small town movie theater
You own a small town movie theater. You currently charge $5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Draw the demand curves from the schedules below then answer the following questions.
Adult Demand
Child Demand
Price
Quantity
Price
Quantity
$8
40
$6
10
$6.5
45
$5
20
$5
50
$4
30
$3.5
55
$3
40
$2
60
$2
50
a.
What is your current total revenue for both groups?
b.
Which market has the more inelastic demand? and which one has the more elastic Demand?
c.
What is the elasticity of demand between the prices of $5 and $2 in the adult market? Is this elastic or inelastic?
d.
What is the elasticity of demand between $5 and $2 in the children's market? Is this elastic or inelastic?
e.
Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to $8 each and lower the price of a child's ticket to $3. How much could you increase total revenue if you take his advice?
Expert Solution
A) Total Revenue from Adults Tickets = 5*50=$250
Total Revenue from Child Tickets = 5*20=$100
Total Revenue from both groups combined = 250+100 = $350
B) Adults demand are inelastic. Children group demand is more elastic as same percentage price change leads higher percentage increase in demand.
C) Computation of Elasticity of demand between the prices of $5 and $2 in the adult market:
Elasticity of demand (Ed) = (Price / Quantity) * (Change in Quantity / Change in Price)
P1 = 5, Q1 = 50
P2 = 2, Q2 = 60
Ed = 5/50 * (60 - 50)/(2- 5)
= - 5/50 * 10/-3
= -1/3
Ed= - 0.33 < 1 Inelastic demand
D) Computation of Elasticity of demand between $5 and $2 in the children's market:
Elasticity of demand = (Price / Quantity) * (Change in Quantity / Change in Price)
P1 = 5, Q1 = 20
P2 = 2, Q2 = 50
Ed = 5/20 * (50 - 20)/(2 - 5)
= - 1/4 * 30/-3
Ed = 2.5 > 1 Elastic Demand
E) Computation of Increase in Total Revenue:
Total Revenue from adult tickets = 8 * 40 = $ 320
Total Revenue from child tickets = 3 * 40 = $ 120
Total Revenue after price change = 320 + 120 = $ 440
Increase in Total Revenue = 440 - 350 = $ 90
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