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2a_Dollar_Theaters

# 2a_Dollar_Theaters - Activity on Demand and Elasticity...

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Activity on Demand and Elasticity Marriott School - BYU ManEc 387 - Economics of Strategy Professor Nile Hatch 1. Graph the demand curve for the University Mall dollar theaters. 2. 3. 4. 5. Does this imply elastic or inelastic demand at a price of \$1? 6. 7. 8. Survey Data: Number of movies that would be viewed monthly by each respondent (1-59) at each price \$3.0 \$2.5 \$2.0 \$1.5 \$1.0 \$0.5 \$- 1 3 4 4 5 6 7 8 2 0 0 0 1 2 2 10 3 2 2 3 3 4 4 7 4 0 0 1 1 2 3 3 5 1 1 2 2 2 2 4 6 1 1 2 2 3 3 4 Listed below is actual data from a survey of a class of 59 BYU students. The survey asked how many times each student would attend a dollar theater to watch a movie in a month at the given prices of admission (see column headings). Thus, the table is a listing of individual demand curves for dollar movies. Assume that these 59 students are representative of a market of approximately 30,000 moviegoers. Further assume that you are constructing the demand curve for the new University Mall dollar movie theater and that this theater has 20 percent market share (independent of price). This activity uses a simplified version of the more traditional demand curve that includes the influence of income and prices of other goods. Here we relate only price to quantity. To find the basic demand for movie tickets, use the spreadsheet to plot the data from the survey as a scatter-plot. (Be sure to convert the data to a population of 30,000, 20 percent of which is served by the theater. Do this by multiplying total quantity at each price point by 101.6949 which is (30,000/59)*20%.) Once the demand curve is plotted, left click on the curve and choose to add a "trendline." You can also use Excel regression tools to fit a demand equation for the relationship between ticket price and quantity sold. Once you have the formula, you can find all of the "in-between values" on the curve by copying the formula down one column and changing price in the other if you want to do this. Estimate the formula for the demand curve. (Hint: Use linear, quadratic, or log-linear regression, or simply fit the best curve using Excel's curve fit feature. Using a demand schedule or a formula, how many tickets will the theater sell in a month at a price of (a) \$2? (b) \$1? (c) \$0? (Hint: you may need to make sure your formula is expressed Q as a function of P.) If the theater is charging a ticket price of \$1, would total ticket revenue increase or decrease with an increase in the price? Compute demand elasticity for (a) \$2 (b) \$1 (c) \$0.50 (Hint: choose a close price point (\$1 difference or less) to move to in order to compute percent change) Find price and quantity at which demand is unitary elastic. Find the revenue maximizing point (Hint: In theory prices under these two approaches should be the same, but they won't be unless you used a very small increment for your price change in No. 6, like \$0.01).

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