Question

You are the manager of a theater. At present the theater charges the same admisssion price of $8 to all customers, regardless of 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 the price elasticity of demand if your proposal is to achieve its goal of raising revenue? Explain your answer.

Answer 1

Step-by-step explanation:

Provided that the demand is inelastic, there would be an increment in revenue.

Total revenue is calculated as the quantity of a good sold multiplied by its price.

There is a close interrelation between price elasticity of demand and total revenue, in the sense that they deal with the same two variables - which are price and quantity.

If the product has an elastic demand, revenue can be increased by decreasing the price of the good. Q will increase at a greater rate, while P will decrease, thereby, increasing the total revenue.

If the product has an inelastic demand, then the prices of goods can be increased and sold slightly less of that item but a higher revenue must be obtained.