Answer to Question #126997 in Microeconomics for Gerald

Question

Suppose you are the manager of a theater. You currently charge the same admission price to all customers, regardless of age. You hire an economist to determine the price elasticity of demand for admissions by age, and he tells you that at the current price, demand by adults is inelastic and demand by children is elastic. If you want to increase your total revenue by adjusting admission prices, how should they be adjusted

Answer 1

Demand elasticity refers to the extent in which supply and demand react to a change in other factors, such as price, availability of substitute and income levels. Inelastic demand refers to little or no change in the demand of a product, when other changes in price or other determinants take place. Elastic demand refers to a substancial change in the quantity of a product demanded when the price changes that is either increased or reduced.

Under the above case the demand of adults is inelastic while that of the children is elastic. Therefore, for you to be able to increase your total revenue by adjusting the admission prices, you will be required to increase the price of the adults admission prices. This is because increasing the adults admission prices will have little effect on them since the demand remain relatively the same and therefore get more revenue from the high admission prices.