Question

EJH Cinemas, a movie theater next to your university, attracts two types of customers: those who are associated with the university (students, faculty, and staff) and locals who live in the surrounding area. There are 10,000 university customers interested in purchasing movie tickets from EJH Cinemas, with a maximum willingness to pay of $7 per ticket. There are 20,000 local customers interested in purchasing tickets, with a maximum willingness to pay of $9 per ticket. The movie theater incurs a constant marginal cost of $4 per ticket. For simplicity, assume each customer purchases, at most, one ticket.

a. What will be the amount of EJH Cinemas’ total revenue if the price is $7 per ticket?

b. What is the amount of consumer surplus if the price is $7 per ticket?

c. What will be the amount of EJH Cinemas’ total revenue if the price is $9 per ticket?

d. What is the amount of consumer surplus if the price is $9 per ticket?

e. If EJH Cinemas decides to practice price discrimination, charging $9 for a standard ticket available to everyone but only $7 for a ticket if you show your university identification (students, faculty, and staff), what will be the movie theater’s total revenue?

f. If EJH Cinemas decides to practice price discrimination, charging $9 for a standard ticket available to everyone but only $7 for a ticket if you show your university identification (students, faculty, and staff), what will be the amount of consumer surplus?

g. If you were in charge of EJH Cinemas, what pricing scheme should you use?

please show the solution.

Answer 1

University customer = 10,000, Willing to pay = $7

Local customer = 20,000, Willing to pay = $9

Total customer = 10,000 + 20,000 = 30,000

a) If price = $7

Total revenue = 30,000 x 7 = 210,000

b) Consumer suplus shows benefit to the consumer, it is the difference between what consumer is willing to pay and what he actually pays.

Consumer surplus = Customer willing to pay - Customer actual pay

Consumer surplus = 10,000 x 7 + 20,000 x 9 - 30,000 x 7 = 40,000

c) If price is $9, then only local customer will buy ticket.

Total revenue = 20,000 x 9 = 180,000

d) Consumer surplus will be 0 at this price.

Consumer surplus = willingness to pay - actual pay = 20,000 x 9 - 20,000 x 9 = 0

e) Total revenue when the price is $7 for university customer and $9 for local customers.

Total revenue = 7 x 10,000 + 9 x 20,000 = 2,50,000.

f) Consumer surplus is 0 again because this pricing extract all the consumer surplus by charging exact amount which they willing to pay.

g) Total cost = Total customer x marginal cost = 30,000 x 4 = 120,000

Profit when price is $7 = Total revenue - Total cost = 210,000 - 120,000 = $90,000

Profit when price is $9 = Total revenue - Total cost = 180,000 - 120,000 = $60,000

Profit when $9 for a standard ticket available to everyone but only $7 for a ticket if you show your university identification (students, faculty, and staff) = Total revenue - total cost = 2,50,000 - 1,20,000 = $1,30,000

If I were in charge of EJH Cinemas, I will use third pricing scheme because that will maximum profit.