Question

Karen owns the YYY concert house, a small venue that hosts musical acts with a capacity of 1,000 people. The marginal cost for each entrant is negligible, so Karen’s objective is to maximize revenues. The demand for a typical show is given by ?? = ???? − ???

a) Sketch the demand curve with price on the vertical axis and quantity on the horizontal axis. Label the intercept values.

b) What is the maximum price Karen can set in order to sell out the venue? Label this point A on your graph above.

d) Is Karen maximizing revenues if she prices to fill capacity? e) Karen is considering a price increase but isn’t sure if she should price at $15 or $18. Use the price elasticity of demand to determine which price satisfies Karen’s objective. f) What is total revenue and consumer surplus at the revenue-maximizing price and quantity?

c) Calculate consumer surplus and revenues associated with the price and quantity at point A

d) ) Is Karen maximizing revenues if she prices to full capacity?

e) Karen is considering a price increase but isn’t sure if she should price at $15 or $18. Use the price elasticity of demand to determine which price satisfies Karen’s objective.

f) What is total revenue and consumer surplus at the revenue-maximizing price and quantity?

Karen determines that her weekday crowd is different from her weekend crowd. The weekday crowd is comprised of a smaller amount of more avid concert goers and follows the following demand function ???????? = ??? − ???

g) Draw the weekday demand curve in your graph from part (a).

h) What is the price elasticity of demand for the weekday crowd at a price of $15? Will increasing the price from $15 increase total revenues?

i) Karen decides not to raise the price on the weekday crowd regulars. Using a behavioral economics concept, briefly describe why she would come to this conclusion.

Answer 1