Question

Last season, the Calgary Flames averaged 19,000 fans per game at an average price of $50 per ticket. At the start of the current season, the Flames decide to increase ticket prices from $50 to $70. Attendance at Flames games has declined to 17,000 tickets sold per game.

a)Do Flames fans have elastic or inelastic demand for their tickets? Why? Use the point method for calculating elasticity to solve this question.

b) Now, use the mid-point method to calculate fans elasticity of demand for Flames tickets. Do you get a different answer than in part a)? Why or why not? b)

c) Should the Flames increase their ticket prices? Why or why not?

Answer 1

Given,

Price elasticity of demand is defined as the sensitiveness of quantity demanded due to the change in price of the product. Mathematically, it is percent change in quantity over percent change in price.

A. Applying point method

Now, simplifying the above formula, we get

Plug in the given values in the above equation we get

The elasticity of demand is less than 1. Hence the elasticity of demand is inelastic.

B. Applying the mid point method

Simplifying the above equation we get

Plug in the given values in the equation we get

Since elasticity demand is -0.33, less than 1. Hence, the elasticity of demand is price inelastic.

We are getting a different answer than in part a. This is so because in the first case we have used a point that is P1 and Q1 to determine the elasticity. While in case b we have used mid point of the two points as the base thus we are getting a different answer to the question.

C. The price elasticity of demand is inelastic therefore when the flames will increase the price their total revenue will increase.

Now after the price change

As we can see the total revenue increased after the price increase. Therefore the firm should increase the price to increase the total revenue of the firm.

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