Question

Derek is the owner of the only movie theater in town. By hiring several well-trained economists, Derek learns that the people watching movies after 8 P.M. have a much higher average willingness to pay than people watching at 5 P.M. The costs of showing a movie are identical at 5 P.M. and 8 P.M. To maximize his profit, what should Derek do? Give him some specific advice, including drawing him a diagram or two. (Derek can get his economists to interpret your diagrams as long as you label all the axes and all the curves.)

plz answer this question

Answer 1

Ans) Price discrimination is the practice of charging different price for same product from different section or group. Price discrimination can be practiced if ÷

• Market can be differentiated on basis of different groups.
• Elasticity is known.
• Resale is prevented.
• Firm has pricing power.

Here, since people who watch movie at 5 pm have less willingness to pay, Derek should charge less price for that time in order to attract more people. This will help raise more revenue.

Further we know that willingness to pay for shows after 8pm is more. Therefore, Derek should charge higher price in order to increase the revenue.

This price discrimination will help Derek to maximise profit by increasing market share.

A profit maximising monopoly produces the quantity where MR and MC curve intersect and then uses demand curve to determine the price.

Above graph shows that willingness to pay for 5 pm shows (in green) is less while willingness to pay for 8 pm shows is more (in red) and therefore Derek should charge more from 8pm shows and less from 5pm shows.

The above graph shows that by charging different price (i.e by practicing price discrimination), Derek can increase his profit. (Shaded portion shows profit).

[Sum of both demand curve is market demand curve]