This is a 3 part question: 1. Movie tickets prices increased by 5% and resulted

Question

This is a 3 part question:

1. Movie tickets prices increased by 5% and resulted in a 8% drop in sales. What is the price elasticity of demand?

2. If ticket prices decreased by 5% instead of raising them, what would the changes in attendance would you expect?

3. If a competing cinema reduced its prices by 10%, how would that affect demand at your cinema?

Using the formula E=%Chg in Q / %Chg in P

I think the first answer is E= -8/5 = -1.6 and the second answer is -1.6=Chg in Q / -5 which makes Q=8. Please correct me if I am wrong. The 3rd question has me stuck, do I base the demand at my cinema off the -1.6? Kinda lost on this one. Please help!

Explanation / Answer

first one you are right its -8/5

second also you are correct

Price elasticity of demand: change in demand/ change in price

here demand == attendance

thus,

price elasticity of demand = -8/5= -1.6

-other factors leading to a decline in attendance could have been:

lower prices at competitve cinemas

better cinema been shown elsewhere

Change in attendance if chnage in price= -5

Change in attendance = -1.6*-5 = 8

i.e, if price elasticity remained constant, then attendance would hve increased by 8%

-If a competing cinema reduced its prices, then demand will fall; i.e, attendance would be lesser.

-decide optimal price by choosing a point where price elasticity is minmal.

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