Question

Question 2 – ALL CALCULATIONS MUST BE SHOWN

A local theme park is losing money. The current price of admission is $60 per person with an average daily attendance of 750 people. You are an independent consultant employed to recommend a pricing strategy. The demand schedule estimated by the consultant is shown in the table below.

Price	Quantity of tickets sold per day	Elasticity
0	1200	--
20	1050
40	900
60	750
80	600
100	450
120	300
140	150
160	0	Infinity

a. Fill in the blanks in the table above. There are 7 empty cells [marked as 0.5 marks per cell correctly filled]. Use the point method (ΔQ/ΔP)*(P/Q) to calculate the own-price elasticity of demand. (3.5 marks)

b. As a consultant what would be your recommendation regarding pricing strategy? Should the theme park change the price from $60? Justify your answer based on the price elasticity of demand. .

c. From the information in the table write the equation for the daily demand for theme park tickets in price dependent form (P=a-bQ). (2.5 marks)

d. Use the midpoint method to calculate the price elasticity of demand from $85 to $90. Explain whether demand is price elastic or price inelastic and interpret the value of this elasticity.

e. Theme park customers are able to purchase a $15 photographic package. At the current ticket price of $60, 34% of customers purchase photographic packages. The theme park estimates that a $3 price increase in theme park tickets would result in a 20% reduction in photographic packages purchased. Provide the name of, and calculate the value of, this elasticity. Interpret its value. What does this elasticity value tell the theme park managers about the relationship between theme park ticket prices and photographic packages? How many customers would purchase the photographic packages if theme park tickets increased by $3?

Answer 1

From Part A to Part D.

Price	Quantity	Change in Q	Change in P	Ed (Point Method)	Remarks	Average Q	Average P	Ed (mid point merthod)	Remarks
0	1200
20	1050	-150	20	0.0	Inelastic	1125	10	-0.07	Inelastic
40	900	-150	20	-0.1	Inelastic	975	30	-0.23	Inelastic
60	750	-150	20	-0.3	Inelastic	825	50	-0.45	Inelastic
80	600	-150	20	-0.6	Inelastic	675	70	-0.78	Inelastic
100	450	-150	20	-1.0	Elastic	525	90	-1.29	Elastic
120	300	-150	20	-1.7	Elastic	375	110	-2.20	Elastic
140	150	-150	20	-3.0	Elastic	225	130	-4.33	Elastic
160	0	-150	20	-7.0	Elastic	75	150	-15.00	Elastic

Whenever the absolute value of price elasticity is less than one (1), the firm should increase price to raise the revenues for the firm. that is if the demand is inelastic, a rise in price will raise revenues. If the demand is elastic then a fall in price will raise revenues. The stretch where the demand is elastic is between price 100 and 160. If then firm want to raise revenues it should reduce the price. The demand is inelastic between 0 and 80, the firm should increase price to earn more revenues.

The equation of the demand function will be Qd = -7.5P + 1200 or P = -0.1333Q + 160

Point Ed Formula = (Change in Q/Change in P)*(Original P/Original Q)

Midpoint Ed Formula = (Change in Q/Change in P)*(Average P/Average Q)

Mid Point Elasticity from P = 85 to 90, Qd is calculated using the demand function

Price	Quantity	Change in Q	Change in P	Average Q	Average P	Ed (mid point merthod)	Remarks
85	171.33
90	172.00	0.66663667	5	171.66665	87.5	0.07	Inelastic