Question

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?

1) Explain the concepts of cross-price elastic of demand, using one of the examples in the table above. What does a positive or negative value indicate? When doing elasticity of demand what is the sign always for a normal good?

2)Explain the concepts of income elasticity using one of the items in the table above. What does a positive value indicate? What about a negative value indicate?

3) When the price of Bob’s Coffee House increased by 8 percent, the quantity demanded of Alex’s Coffee House increased by 10 percent. What would be the cross- price elastic of demand between Bob’s & Alex’s coffee? What is the relationship between these two goods (are they compliments?)

4) Suppose the current price of oil is $90 a barrel and the quantity supplied is 800 million barrels per day. If the price elasticity of supply for oil in the short run is estimated at 0.5, use the midpoint formula to calculate the percentage change in quantity supplied when the price of oil rises to $98 a barrel.

Answer 1

Then to increase revenue the childrens group must have inelastic demand and the adult group must have elastic demand.