Question

1. What is the relationship between price elasticity of demand and total revenue?

2.You are the manager of a theater. At present the theater charges the same admission price of $8 to all customers, regardless of age. You propose a two-tier pricing scheme: $5 for children under the age of 12 and $10 for adults. You tell your supervisor that your proposal is likely to increase revenue. What must be true about the price elasticity of demand if your proposal is to achieve its goal of raising revenue? Explain your answer.

3. If pilots and flight attendants agree to wage and benefit reductions in the wake of the financial difficulties in the airline industry, what impact would this have on the supply and demand in the market for airline service, assuming no other changes take place in this market?

Use your own words to explain， thank you.

Answer 1

1.

Price elasticity of demand measures the responsiveness of the consumers towards the change in prices and change in prices will change the total revenue earned by the firms. It means that price elasticity of demand has relationship with the total revenue. Though, the degree of strength of the relationship, depends upon the value and type of elasticity of demand.

If there is inelastic demand, then increase in price will not affect the demand and revenue will increase considerably. But, when there is an elastic demand, then change in price will bring relatively bigger change in demand and revenue will be affected significantly . So, it is the price elasticity of demand that helps firm fix the price and earn total revenue.

2.

To increase the total revenue with two-tier pricing, the following conditions must be true:

1. Price elasticity of demand among the children should relatively elastic, so that decrease in price from $8 to $5, will significantly increase the demand and more revenue will be collected.

2. Price elasticity of demand among the adults should be relatively inelastic, so that increase in price from $8 to $10, will not decrease the demand. As a result, revenue collected from the adults will also increase significantly.

Above conditions must be met and true to increase the total revenue by applying two-tier pricing.

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