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Chapter 6: Problem 4

An article in the New York Times about the New York Metropolitan Opera (the Met) suggested that the popularity of opera might be increased if the Met reduced its ticket prices. But the article observed that such ticket price cuts would be possible only if the Met received a gift from "a very deep- pocketed donor." What were the authors of the article assuming would happen to the Met's revenue following the cut in ticket prices? What were they assuming about the price elasticity of demand for tickets to the Met? Briefly explain.

Short Answer

Expert verified
The authors of the article assume that the reduction in ticket prices would decrease the Met's revenue, because they believe the demand for opera tickets is inelastic. This means that a decrease in price won't significantly increase the quantity of tickets sold, leading to a decrease in total revenue.

Step by step solution

01

Understand the scenario

In this exercise, we're looking at the possibility of reducing ticket prices at the New York Metropolitan Opera (the Met). According to an article, the idea is that making tickets more affordable might attract larger audiences and thus boost the popularity of opera. However, the article suggests this would require significant financial support from 'a very deep-pocketed donor'.
02

Analyze the assumptions about the Met's revenue

By suggesting that a generous gift is required to make the change sustainable, the authors imply a financial impact. In other words, reducing ticket prices would likely lead to a direct decrease in revenue, assuming the number of ticket sales remains constant. The suggestion seems to be that the loss in revenue could not be compensated immediately by increasing the number of tickets sold.
03

Understand the concept of price elasticity

Price elasticity of demand is a term that measures how demand for a service changes when the price for it changes. If demand is elastic, a decrease in price will result in an increase in demand, enough to offset the loss of revenue. If demand is inelastic, a decrease in price won't significantly increase demand and thus, will result in a decrease in overall revenue.
04

Analyze the assumptions about price elasticity

The authors are implying that the demand for opera tickets is relatively inelastic. This means that even if ticket prices were to fall, there wouldn't be a large-enough increase in ticket sales to compensate for the loss in revenue per ticket. Therefore, even with lower prices, without financial backing from a donor, the Met's overall revenue would decrease.

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Most popular questions from this chapter

The price elasticity of demand for crude oil in the United States has been estimated to be -0.06 in the short run and -0.45 in the long run. Why would the demand for crude oil be more price elastic in the long run than in the short run?

The entrance fee into Yellowstone National Park in northwestern Wyoming is " 30 for a private, noncommercial vehicle; \(\$ 25\) for a motorcycle or a snowmobile; or \(\$ 15\) for each visitor 16 and older entering by foot, bike, ski, etc." The fee provides the visitor with a seven-day entrance permit into Yellowstone and nearby Grand Teton National Park. a. Would you expect the demand for entry into Yellowstone National Park for visitors in private, noncommercial vehicles to be elastic or inelastic? Briefly explain. b. There are three general ways to enter the park: in a private, noncommercial vehicle; on a motorcycle; and by foot, bike, or ski. Which way would you expect to have the largest price elasticity of demand, and which would you expect to have the smallest price elasticity of demand? Briefly explain.

In recent years, increases in the number of visitors to national parks such as Yellowstone and Grand Canyon have resulted in over \(\$ 12\) billion in deferred maintenance costs. In response to the overcrowding that has contributed to the cost overruns, the Park Service has considered limiting the number of daily visits to the parks and soliciting corporate sponsorships. Margaret Walls, a research director and senior fellow at Resources for the Future, has offered another suggestion: Increase entrance fees. But she warned: "Figuring out an efficient and fair fee structure will not be easy. It requires detailed data on visitation, for starters, as well as analysis to shed light on price elasticities of demand for different groups of visitors at different locations." Why is it important for the Park Service to have estimates of price elasticities of demand before raising entrance fees to the national parks?

What is the midpoint formula for calculating price elasticity of demand? How else can you calculate the price elasticity of demand? What is the advantage of using the midpoint formula?

Write the formula for the price elasticity of demand. Why isn't elasticity just measured by the slope of the demand curve?
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