A movie theatre has a cost function which entails the rent of the commercial bui
ID: 1215359 • Letter: A
Question
A movie theatre has a cost function which entails the rent of the commercial building of $50 per day (fixed cost) and a marginal cost of $5 per viewer. There are eight potential viewers (four of them are students and four of them are not) with buyer values given in the table below
Students
Others
$19
$22
$13
$18
$11
$16
$3
$10
Assume that the movie theater cannot price discriminate and has to decide on the price it charges all viewers. Create a table in which you represent the price, the corresponding quantity demanded, the total revenue, the marginal revenue, the marginal cost, and the profit of the movie theater.
Price
Qty
Total Rev
Marg Rev
Marg Cost
Total Cost
Profit/Loss
22
1
22
22
5
55
-33
19
2
38
16
5
60
-22
18
3
54
16
5
65
-11
16
4
64
10
5
70
-6
13
5
65
1
5
75
-10
11
6
66
1
5
80
-14
10
7
70
4
5
85
-15
3
8
24
-46
5
90
-66
Determine the optimal price of a movie ticket and the profit of the movie theater in the short run if the seller does not price discriminate. What is the optimal decision of the movie theater in the short run and in the long run about staying or exiting the business? Explain how you reached your conclusion.
Assume now that the movie theatre can give price discounts to students. Explain the concept of price discrimination and the type of price discrimination in the context of the current example. Is this direct or indirect price discrimination? Explain the market conditions which allow sellers to price discriminate (discuss in detail at least three conditions).
Determine the optimal ticket prices for students and for others. Determine the revenue of the movie theatre. Determine the optimal decision of the movie theatre in the short and in the long run. Explain your approach.
Students
Others
$19
$22
$13
$18
$11
$16
$3
$10
Explanation / Answer
b. The optimal price of the movie ticket in the short run shall be $16 in the event that the seller does not discriminate with the pricing . This is because this is the level where we reached the minimum losses. Whereas in the scenario of the long run the whole picture will change since there are no fixed costs in the long run and all expenses are variable. So one should stay in the business since this will be a profitable one in the future.
C. Price discrimination is basically the strategy of pricing similar goods or services at different prices to different buyers or in different markets. If the movie theatre gives discount to the students then it is a pure example of group pricing or third degree price differentiation. This is a direct discrimination. The various market conditions which allows sellers to discriminate the pricing are:-
D.
Price
Quantity
Total reveue
Marginal revenue
Marginal cost
Total cost
Profit / Loss
22
1
22
22
5
55
-33
19
2
38
16
5
60
-22
18
3
54
16
5
65
-11
16
4
64
10
5
70
-6
13
5
77
13
5
75
2
11
6
86
9
5
80
6
10
7
94
8
5
85
9
3
8
76
-18
5
90
-14
Now in the above table assuming that the first 4 customers are other than students than the maximum discount to then can be $16. Further discount can be given to students only thus the profit in the short run is maximum at $10 which gives a maximum revenue of $94.
Price
Quantity
Total reveue
Marginal revenue
Marginal cost
Total cost
Profit / Loss
22
1
22
22
5
55
-33
19
2
38
16
5
60
-22
18
3
54
16
5
65
-11
16
4
64
10
5
70
-6
13
5
77
13
5
75
2
11
6
86
9
5
80
6
10
7
94
8
5
85
9
3
8
76
-18
5
90
-14
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