Suppose that a film studio rents its movies for two weeks to the three theaters

Question

Suppose that a film studio rents its movies for two weeks to the three theaters in its distribution system. The studio has two movies to rent, an A and a B level movie. The valuations of the two movies by theater are shown in the table below. Assume that the studio must charge the same rents to all theaters. Assume that if a theater is indifferent between any two options, it chooses the one preferred by the studio. Theater Theater1 Theater 2 Theater 3 Film A $12,000 $14,000 $7,000 Film B $6,000 $3,000 $5,000

Explanation / Answer

8. d) $18000

Studio will sell film a for $12000 and will sell film b for $6000. At this price no other theatre will purchase and hence total revenue will be $18000.

** One possibility is that studio charge price equal to third theatre's valuation. At this price studio can sell to threatre one and three thus earning maximum revenue of $7000*2+ $5000*2 = $24000. But this is not given as option .

9). b

Studio will sell film a for $12000 and will earn $24000 . Studio will sell film sell for $5000 thus earning $10000. Thus total revenue will be $24000+$10000= $34000

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