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Chapter 11: Problem 2

If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.

Short Answer

Expert verified
Therefore, the statement is True. If the demand for drive-in movies is more elastic for couples than for single individuals, it would be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. This is because such a strategy can help maintain attendance rates among both types of patrons despite varying price elasticity of demand.

Step by step solution

01

Understanding Elasticity

First, it is crucial to examine the idea of elasticity. Elastic demand involves a strong change in demand in response to a change in price. If drive-in movie demand is more elastic for couples than for single people, it implies couples will alter their movie-going habits more dramatically as prices change. For instance, an increased cost might discourage couples more than singles.
02

Price Segmentation

Next, understand that subscribers' willingness to pay differs. Singles have a less elastic demand, implying they'd likely continue to attend even as prices rise. Meanwhile, for couples with more elastic demand, a price increase could result in a significant loss in demand. A method to optimize earnings may be to charge an admission fee for the driver and an additional fee for passengers. In this scenario, even if the total per-car price increases, the individual perceived price for couples (i.e. per person price) could seem lower, stimulating demand.
03

Evaluating the Statement

Once the impacts of pricing on different buyer behavior are well understood, evaluate the statement. Given the elasticity behaviours, it would make sense to give an admission charge for the driver and an extra charge for passengers. The segmentation would allow the theater to maintain demand among couples and not deter singles from attending.

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Most popular questions from this chapter

Elizabeth Airlines (EA) flies only one route: ChicagoHonolulu. The demand for each flight is \(Q=500-P\) EA's cost of running each flight is \(\$ 30,000\) plus \(\$ 100\) per passenger. a. What is the profit-maximizing price that EA will charge? How many people will be on each flight? What is EA's profit for each flight? b. EA learns that the fixed costs per flight are in fact \(\$ 41,000\) instead of \(\$ 30,000 .\) Will the airline stay in business for long? Illustrate your answer using a graph of the demand curve that EA faces, EA's average cost curve when fixed costs are \(\$ 30,000,\) and EA's average cost curve when fixed costs are \(\$ 41,000\) c. Wait! EA finds out that two different types of people fly to Honolulu. Type \(A\) consists of business people with a demand of \(Q_{\lambda}=260-0.4 P\). Type \(B\) consists of students whose total demand is \(Q_{\mathrm{B}}=240-0.6 P\) Because the students are easy to spot, EA decides to charge them different prices. Graph each of these demand curves and their horizontal sum. What price does EA charge the students? What price does it charge other customers? How many of each type are on each flight? d. What would EA's profit be for each flight? Would the airline stay in business? Calculate the consumer surplus of each consumer group. What is the total consumer surplus? e. Before EA started price discriminating, how much consumer surplus was the Type \(A\) demand getting from air travel to Honolulu? Type \(B\) ? Why did total consumer surplus decline with price discrimination, even though total quantity sold remained unchanged?

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