Question

Derek is the owner of the only movie theater in town. By hiring several well-trained economists, Derek learns that the people watching movies after 8 P.M. have a much higher average willingness to pay than people watching at 5 P.M. The costs of showing a movie are identical at 5 P.M. and 8 P.M. To maximize his profit, what should Derek do? Give him some specific advice, including drawing him a diagram or two. (Derek can get his economists to interpret your diagrams as long as you label all the axes and all the curves.)

Answer 1

In order to maximize his profit, Derek should charge a lower price for his 5 o’clock movies and a higher price for his 8 o’clock movies. In other words, Derek should price discriminate because by so doing, Derek increases his economic profit.

The following figures will explain

The marginal cost of showing a movie at 5 P.M. or at 8 P.M. is assumed to be constant. In order to maximize his profit in the 5 o’clock market, Derek equates MR to MC and sells 200 tickets by charging $7.50 per ticket. In the high demand, 8 P.M. market, Derek sells 300 tickets by charging $10.50 per ticket. By charging a lower price at 5 P.M. and a higher price at 8 P.M., Derek is able to increase his economic profit because he is maximizing his profit in both markets. If he charged the same price in both markets, he would not be maximizing his profit.