Principles of Economics- Mankiw (5th) 98

Principles of Economics- Mankiw (5th) 98 - 102 PA R T T W O...

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102 PART TWO SUPPLY AND DEMAND I: HOW MARKETS WORK CASE STUDY PRICING ADMISSION TO A MUSEUM You are curator of a major art museum. Your director of finance tells you that the museum is running short of funds and suggests that you consider chang- ing the price of admission to increase total revenue. What do you do? Do you raise the price of admission, or do you lower it? The answer depends on the elasticity of demand. If the demand for visits to the museum is inelastic, then an increase in the price of admission would in- crease total revenue. But if the demand is elastic, then an increase in price would cause the number of visitors to fall by so much that total revenue would decrease. In this case, you should cut the price. The number of visitors would rise by so much that total revenue would increase. To estimate the price elasticity of demand, you would need to turn to your statisticians. They might use historical data to study how museum attendance varied from year to year as the admission price changed. Or they might use
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