Question

2. The magnitude of price elasticity of demand directly affects the change in income resulting from the change in prices by the producer. Let's say that the price elasticity of professional baseball tickets is 0.8 if the ticket price is between 3,000 and 5,000 , and 1.2 if the ticket price is between 5,000 and 7,000 , and 2 if it is over 7,000 .
Currently, the admission fee is 5,000. How should the admission fee be adjusted to increase admission income?

Answer 1

Elasticity of demand = %change in quantity demanded / %change in price

If %change in quantity demanded < %change in price, demand is inelastic which means consumer reduce their quantity demanded by less than rise in price.

If %change in quantity demanded > %change in price, demand is elastic which means consumers are very responsive and change quantity demanded by much larger than change in price.

If the admission fee is 5,000 now, by reducing the price by producer would take price in the range of 3,000 - 5,000 where demand is inelastic (elasticity of demand = 0.8 is inleastic). By reducing the price, consumers will not change their quantity demanded by much which will reduce the revenue. If producer raise the price such that it is in the range of 5,000 - 7,000, consumers will reduce their quantity demanded by more than rise in price which will also reduce revenue. So, I would suggest to keep price same to maximize revenue.