Question

you are the manager of a theatre. at present, the theatre charges the same admission price of $8 to all customers, regardless of their age. you propose a two-tier pricing scheme: $5 for children under the age of 12 and $10 for adults. you tell your supervisor that your proposal is likely to increase revenues. what must be true about the price elasticity of demand if your proposal is to achieve its goal of raising revenue? discuss and provide an economic analysis using a diagram?

Answer 1

The proposal to implement a two-tier pricing scheme with different admission prices for children and adults can increase revenues if the price elasticity of demand for theater tickets is inelastic for adults and elastic for children.

Step-by-step explanation:

The proposal to implement a two-tier pricing scheme with different admission prices for children and adults is likely to increase revenues if the price elasticity of demand for theater tickets is inelastic for adults and elastic for children. Price elasticity of demand measures how responsive the quantity demanded of a good is to a change in its price. If demand is inelastic, a price increase will result in a smaller decrease in quantity sold, leading to an increase in total revenue. On the other hand, if demand is elastic, a price decrease will result in a larger increase in quantity sold, also leading to an increase in total revenue.

A diagram representing the relationship between price and quantity demanded can be used to illustrate this concept. In the diagram, demand is typically represented as a downward-sloping line, indicating that as price decreases, quantity demanded increases. The steeper the slope of the line, the more elastic the demand. If the demand curve for children is steeper than the demand curve for adults, it suggests that demand is more elastic for children than for adults. Therefore, implementing a lower price for children could attract more child customers, resulting in an increase in total revenue.