Question

As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that has revealed two different demand curves at your movie theaters. On weekends, the inverse demand function is P = 20 – 0.001Q; on weekdays, it is P = 15 – 0.002Q.

You acquire legal rights from movie producers to show their films at a cost of $25,000 per movie, plus a $2.50 “royalty” for each moviegoer entering your theaters (the average moviegoer in your market watches a movie only once). What type of pricing strategy should you consider in this case?

Third degree price discrimination

Block pricing

Second degree price discrimination

First degree price discrimination

What price should you charge on weekends? Instruction: Enter your response rounded to two decimal places.

What price should you charge on weekdays?

Answer 1

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it is third-degree price discrimination type of pricing strategy

Third-degree price discrimination:- Where the producer/manufacture charging a different price to different groups of consumers for the same good. in the above case, different groups of the consumer are weekdays and weekend demand.

Not the Block pricing because

Block Pricing: Pricing strategy where identical products are sold together in order to earn profits by charging customers to make an all-or-none decision to purchase. where the demand function is the same for the blocks.

the Price charge at weekdays and weekends:

weekends inverse demand  = P1 = 20 -0.001Q1

weekdays inverse demand = P2 = 15 - 0.002Q2

Fixed Cost = 25000

Variable Cost = 2.5Q

Total Cost = 25000 + 2.5Q

where Q = Q1 + Q2

Total Revenue = Price*Quantity

for first market = P1*Q1 = 20Q1 -0.001Q21

for second market = P2*Q2 = 15Q2 - 0.002Q22

Profit = Total revenue - Total cost

Profit Maximisation

Profit = 20Q1 -0.001Q21 + 15Q2 - 0.002Q22 - 25000 + 2.5Q where Q = Q1 + Q2

Profit = 20Q1 -0.001Q21 + 15Q2 - 0.002Q22 - 25000 + 2.5Q1 + 2.5Q2

Profit = 17.5Q1 -0.001Q21 + 12.5Q2 - 0.002Q22 - 25000

diffrenciate with respect to Q1

d(profit)/dQ1 = d(17.5Q1 -0.001Q21 + 12.5Q2 - 0.002Q22 - 25000)/dQ1 = 0

= 17.5 - 2*(0.001)Q1 = 0

= Q1 = 17.5/0.002 = 8750

diffrenciate with respect to Q1 Q2

d(profit)/dQ2 = d(17.5Q1 -0.001Q21 + 12.5Q2 - 0.002Q22 - 25000)/dQ2 = 0

= 12.5 - 0.004Q2  = 0

Q2 = 12.5/0.004 = 3125

Demand are

Weekends Demand(Q1) equal to 8750

Weekends Demand(Q2) equal to 3125

Prices are

Weekends inverse demand  = P1 = 20 -0.001Q1 = 20 -0.001(8750) = 20 - 8.75 = 11.25

Weekdays inverse demand = P2 = 15 - 0.002Q2 = 15 - 0.002(3125) = 15 - 6.25 = 8.75