Crown Cinema recently increased the price of a movie ticket by 5%. As a result,

Question

Crown Cinema recently increased the price of a movie ticket by 5%. As a result, attendance dropped by 8%. Based on this information, what is the price elasticity of demand for movie tickets at Crown? What, if any, other factors could have accounted for some of the decline in attendance leading to an overinflated price elasticity of demand? If the cinema reduced its prices by 5% instead of raising its prices by 5%, what change in attendance would you expect? If a competing cinema reduced its prices by 10%, how would you expect this action to affect demand at Crown? How should the cinema determine an optimal ticket price?

Explanation / Answer

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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