# ps5_sol - EC 101.03 Exercises for Chapter 5 FALL 2010 1 You...

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EC 101.03 Exercises for Chapter 5 FALL 2010 1. You own a small town movie theatre. You currently charge \$5 per ticket for everyone who comes to your movies. Your friend who took an economics course in college tells you that there may be a way to increase your total revenue. Given the demand curves shown, answer the following questions. Adult Demand 10 20 30 40 50 60 70 80 90 100 Quantity 1 2 3 4 5 6 7 8 9 10 Price Child Demand 5 10 15 20 25 30 35 40 45 50 55 60 65 70 Quantity 1 2 3 4 5 6 7 8 9 10 Price 1

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a. What is your current total revenue for both groups? b. The elasticity of demand is more elastic in which market? c. Which market has the more inelastic demand? d. What is the elasticity of demand between the prices of \$5 and \$2 in the adult market? Is this elastic or inelastic? e. What is the elasticity of demand between \$5 and \$2 in the children's market? Is this elastic or inelastic? 2
f. Given the graphs and what your friend knows about economics, he recommends you increase the price of adult tickets to \$8 each and lower the price of a child's ticket to \$3. How much could you increase total revenue if you take his advice? 3

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ANS: 4
a. Total revenue from children's tickets is \$100 and from adult tickets is \$250. Total revenue from all sales would be \$350. b. The demand for children's tickets is more elastic. c. The adult ticket market has the more inelastic demand. d. The elasticity of demand between \$5 and \$2 is 0.26, which is inelastic. e. The elasticity of demand between \$5 and \$2 is 1.0, which is unit elastic. 5

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f. Total revenue in the adult market would be \$320. Total revenue in the children’s market would be \$120, so total revenue for both groups would be \$440. \$440 - \$350 is an increase in total revenue of \$90. 6
2. Use the graph shown to answer the following questions. Put the correct letter(s) in the blank. Demand A B C Quantity Price 7

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The elastic section of the graph is represented by section from _______. b. The inelastic section of the graph is represented by section from _______. c. The unit elastic section of the graph is represented by section _______. d. The portion of the graph in which a decrease in price would cause total revenue to fall would be from _________. e. The portion of the graph in which a decrease in price would cause total revenue to rise would be from _________. f. The portion of the graph in which a decrease in price would not cause a change in total revenue would be _________. g. The section of the graph in which total revenue would be at a maximum would be _______. h. The section of the graph in which elasticity is greater than 1 is _______. i. The section of the graph in which elasticity is equal to 1 is ______. 8
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ps5_sol - EC 101.03 Exercises for Chapter 5 FALL 2010 1 You...

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