Question

A movie theater has a cost function which entails the rent of the commercial building of $50 per day (fixed cost) and a marginal cost of $5 per viewer. There are eight potential viewers (four of them are students and four are not) with buyer values given in the table below:

Students	Others
$19	$22
$13	$18
$11	$16
$3	$10

A) Assume that the movie theater cannot price discriminate and has to decide on the price it charges all viewers. Create a table in which you represent the price, the corresponding quantity demanded, the total revenue, the marginal revenue, the marginal cost, and the profit of the movie theater

B) Determine the optimal price of a movie ticket and the profit of the movie theater in the short run if the seller does not price discriminate. What is the optimal decision of the movie theater in the short run and in the long run about staying or exiting the business? Explain how you reached your conclusion.

C) Assume now that the movie theater can give price discounts to students. Explain the concept of price discrimination and the type of price discrimination in the context of the current example. Is this direct or indirect price discrimination? Please explain the market conditions which allow sellers to price discriminate (discuss in detail at least three conditions).

D) Determine the optimal ticket prices for students and for others. Determine the revenue of the movie theater. Determine the optimal decision of the movie theater in the short run and in the long run. Explain your approach.

Answer 1

Answer;

A and B are shown in the chart

C

Ans:

Price Discrimination

This involves charging a different price to different groups of people for the same good. For example: student discounts, off peak fares cheaper than peak fares.

Different Types of Price Discrimination

1. First Degree Price Discrimination

This involves charging consumers the maximum price that they are willing to pay. There will be no consumer surplus.

2. Second Degree Price Discrimination

This involves charging different prices depending upon the quantity consumed.

E.g. after 10 minutes phone calls become cheaper.

3. Third Degree Price Discrimination

This involves charging different prices to different groups of people. E.g. students, OAPs and peak travellers e.t.c.

Conditions Necessary for Price Discrimination

1.    The firm must operate in imperfect competition, it must be a price maker with a downwardly sloping demand curve.

2.    The firm must be able to separate markets and prevent resale. E.g. stopping an adults using a child’s ticket.

3.    Different consumer groups must have elasticities of demand. E.g. students with low income will be more price elastic.

D

Ans:

As we see in the chart for B that the profit is negative so the decision of producer in short run and long run is discriminate price as per person .