Question

Graph a typical linear (that means straight line) supply and demand curve for the tickets to a 100,000 seat stadium. Assume that the # of seats in the stadium is fixed at the beginning, and price of each ticket is $50. Label each axis properly and denote equilibrium price and quantity, P* and Q*, respectively. Now, consider that the ticket we just drew the supply and demand for, is a normal good. Suppose the average household income goes down in the state where this stadium is located due to recession. Also, suppose that a major renovation is done to the stadium that results in 10000 more (new) seats. Using the same graph, after these two simultaneous changes what will happen (increase, decrease, stay the same, cannot tell) to supply, demand, equilibrium price, and equilibrium quantity? Please make sure to label the equilibrium point, price, quantity, supply, and demand before and after the changes.

a) How many tickets will the team sell when it maximizes its profit if the MC of a ticket is 40$

b) What will the price be when the team maximizes profit?

c) How much revenue will the team earn when it maximizes revenue?

Answer 1

Ticket is a normal good . If the household income goes down then demand for tickets will also go down since it is normal good . So the demand curve will shift left .

Due to renovation , there more new seats . So supply of seats increases . Hence the supply curve shifts right .

So we can see from the graph that in the new equilibrium where D2 cuts S2 , the equilibrium price falls . But the effect on equilibrium quantity is ambiguous or we cannot tell .

a) MC = price . At 40$ the team will try to sell all the tickets .

b) The price should be atleast 40$ to cover all the costs .

c) Revenue = No of tickets * price