Question

Suppose the Tampa Bay Rays baseball team charges $10 for bleacher seats (low quality seats in the outfield) and sells 250,000 of them over the course of the season. The next season, the Rays increase the price to $12 and sell 200,000 tickets.

a. What is the price elasticity of demand for bleacher seats at Rays’ games?

b. Assuming the marginal cost of admitting one more fan is zero, is the price increase a good idea

Answer 1

Answer: (a) ε = %ΔQ/%Δp

       = ((200,000 − 250,000)/250,000)/((12 − 10)/10) = −1.00. Demand is unit elastic since | ε | = 1.00. Alternatively, if a price increase of 20 percent leads to a 20 percent decline in ticket sales, the elasticity is −20/20 or −1.00.

(b) The price increase is not a good idea . Total revenues have fallen from $2,500,000 = (250,000)(10) to $2,400,000 = (200,000)(12). Anytime elasticity is greater than one, an increase in prices will result in a drop in total revenue.