8. Movie theaters often charge substantially less for afternoon showings than for evening showings. Explain how theaters use time of day to segment their customers into low-elasticity and high-elasticity groups. 8. The demand for afternoon showings is more elastic than the demand for the evening showings. Hence, the afternoon group is a high-elasticity group that is charged less. Since the demand for the evening showings is relatively inelastic, the low-elasticity group that attends evening showings is charged more. The daytime customers (who are clearly not working during normal working hours) might have lower incomes that may cause them to be more price-sensitive (because each ticket they buy consumes a larger share of their budget). 9. Owners of a movie theater have determined that the elasticity of demand for movie tickets equals – 2.0 for students and – 1.5 for adults. a. If the owners of the theater decide to segment the market, who should be charged a higher price, stu- dents or adults? Use your knowledge of microeconomic theory to explain why. b. Use the Lerner index as described in the text to determine the ratio of prices. In percentage terms, how big a price premium should be charged to the group that pays the higher price? 9. a. From the Lerner index, ( P – MC ) _ P = 1 _ – E D the price for students is ( P – MC ) _ P = 1 _ 2 P = 2 P – 2 MC = 2 MC The price for adults is ( P – MC ) _ P = 1 _ 1.5 P = 1.5 P – 1.5 MC = 3 MC Thus, adults should be charged a higher price. From microeconomic theory, adults have a more inelastic demand for theater tickets when compared to students, so they should be charged more. Goolsbee1e_Solutions_Manual_Ch10.indd 131 Goolsbee1e_Solutions_Manual_Ch10.indd 131 11/15/12 3:09 PM 11/15/12 3:09 PM
132 Part 3 Markets and Prices Solution b. The ratio of prices is P Student _ P Adult = 2 _ 3 Rearranging the above, we obtain P Adult = 1.5 P Student . Therefore, adults are charged 50% more than students. 10. Owners of a Florida restaurant estimate that the elasticity of demand for meals is – 1.5 for senior citizens and – 1.33 for everyone else. a. Given this information, how big (in percentage terms) should the senior citizen discount be? b. Suppose that the restaurant owners discover that seniors tend to demand more attention from their waiters and send back more food as unsatisfactory, to the extent that the marginal cost of serving a senior is twice as high as serving an adult. Accounting for these costs, how large should the senior citizen discount be? ( Hint: Refer back to the example in the text, but don’t cancel out marginal costs!) c. Were your results in part (b) surprising? Explain them, intuitively. 10. a. The price for senior citizens is ( P – MC ) _ P = 1 _ 1.5 P = 1.5 P – 1.5 MC = 3 MC The price for everyone else is ( P – MC ) _ P = 1 _ 1.33 P = 1.33 P – 1.33 MC P ≈ 4 MC The senior citizen discount should be approximately 25%.