Unit_III_Assignment_Worksheet - Microecon

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Unit III Assignment Worksheet Background Information The Ruby Red Movie Theater in town is in jeopardy of having to close its doors because it is unable to generate enough total revenue. In an effort to generate more total revenue, the movie theater manager decided to change the prices this month for drinks, popcorn, candy, hot dogs, and movie tickets. The manager would like for you to analyze the data that has been collected to help decide if the decisions to change the prices were correct and, if not, what should be done to prices to generate more total revenue. Be sure to answer all of the questions in this worksheet. Question 1 Information regarding the community’s average income and movie ticket sales at the Ruby Red Movie Theater for both last year and this year are presented below. Use this information when answering questions A-C, below. Last Year This Year Community’s Average Income $55,800 $57,474 Movie Ticket Sales $4,980 $5,021 A. Calculate the Income Elasticity of Demand for movie tickets. (Show your work; you can type it in the box below, or write it out by hand, take a picture, and insert the picture in the box. Make sure it fits in the box. NOTE: These options apply to all “Show your work” responses.) d= ∆D/D Ꞓ ∆I/I d= 41 / 5021 Ꞓ 1674 / 57474 d= 0.0082 Ꞓ 0.029 d= 0.283 Ꞓ

B. Are movie tickets considered to be inferior goods, normal goods, or unit (unitary) goods in this town? Explain why. Movie tickets are normal goods. Ticket prices will see an increase along side of the consumers’ increase of income. Normal goods Elasticity of Demand is always positive and between 0 to 1. C. A new firm is relocating to the city and adding a large number of above average salaries. Will the number of movie ticket sales for the theater increase, decrease, or remain constant? Base your answer on information you answered in part B above. With more people moving to the city earning above average salaries, the number of movie ticket sales should increase as this is a normal good. Continue on next page

Question 2 The manager at Ruby Red Movie Theater decided to change the prices of concession stand items as well as tickets this month in an effort to increase revenues. Below, you are provided with prices for last month and this month as well as the quantities demanded for both months. Use this information when answering questions A-H, below. Price Quantity Demanded Item Last Month This Month Last Month This Month Large Drink $6.00 $5.50 150 161 Large Popcorn $7.50 $8.00 125 101 Small Drink $2.50 $2.00 75 80 Small Popcorn $5.00 $5.25 45 39 Candy $4.00 $3.50 57 68 Hot Dog $5.00 $5.25 35 36 Movie Tickets $8.00 $9.00 428 300 A. Calculate the total revenues earned by the theater last month and this month (Show your work). Total revenues last month = $6077.00 Total revenues this month = $5185.25

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B. Calculate the price elasticity of demand for large drinks . (Show your work) ep = ∆D/D ∆P/P ep = 11/161 0.5/5.5 ep = 0.068 0.091 ep = -0.75 Is the price elasticity of demand for large drinks price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Inelastic; The price elasticity of demand for large drinks is is less than 1. Continue on next page

C. Calculate the price elasticity of demand for large popcorn . (Show your work) ep = ∆D/D ∆P/P ep = -24/101 0.5/8 ep = -0.238 0.0625 ep = -3.808 Is the price elasticity of demand for large popcorn price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Elastic; The price elasticity of demand for large popcorn is greater than 1. Continue on next page

D. Calculate the price elasticity of demand for small drinks . (Show your work) ep = ∆D/D ∆P/P ep = 5/80 0.05/2 ep = 0.0625 0.025 ep = 2.5 Is the price elasticity of demand for small drinks price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Elastic; The price elasticity of demand for small drinks is greater than 1. Continue on next page

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E. Calculate the price elasticity of demand for small popcorn . (Show your work) ep = ∆D/D ∆P/P ep = -6/39 0.25/5.25 ep = -0.154 0.048 ep = -3.2 Is the price elasticity of demand for small popcorn price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Elastic; The price elasticity of demand for small popcorn is greater than 1. Continue on next page

F. Calculate the price elasticity of demand for candy . (Show your work) ep = ∆D/D ∆P/P ep = 11/68 -0.5/4 ep = 0.162 -0.135 ep = -1.2 Is the price elasticity of demand for candy price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Elastic; The price elasticity of demand for candy is greater than 1. Continue on next page

G. Calculate the price elasticity of demand for hot dogs . (Show your work) ep = ∆D/D ∆P/P ep = 1/36 0.25/5.25 ep = 0.028 0.048 ep = 0.583 Is the price elasticity of demand for hot dogs price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Inelastic; The price elasticity of demand for hot dogs is less than 1. Continue on next page

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H. Calculate the price elasticity of demand for movie tickets . (Show your work) ep = ∆D/D ∆P/P ep = -128/300 1/9 ep = -0.427 0.111 ep = -3.84 Is the price elasticity of demand for movie tickets price elastic, inelastic, or unit (unitary)? Briefly explain why in the box below. Answer = Elastic; The price elasticity of demand for movie tickets is greater than 1. Continue on next page

Question 3 Based on the relationship between price elasticity of demand and total revenues, evaluate whether the individual price changes the manager made were correct or not. Remember, Ruby Red Movie Theater wants to increase total revenue. A. Was the decision to decrease the price of large drinks appropriate to increase total revenues? Why, or why not? Briefly explain in the box below. Answer = Decreasing the price of large drinks seems to be inappropriate as it is inelastic to price and would decrease the total revenue. B. Was the decision to increase the price of large popcorn appropriate to increase total revenues? Why, or why not? Briefly explain in the box below. Answer = Increasing the price of large popcorn is inappropriate too, as it is elastic to price and would affect the total revenue inversely. C. Was the decision to decrease the price of small drinks appropriate to increase total revenues? Why, or why not? Briefly explain in the box below. Answer = D ecreasing the price of small drinks seems to be inappropriate as it is inelastic to price and would decrease the total revenue. D. Was the decision to increase the price of small popcorn appropriate to increase total revenues? Why, or why not? Briefly explain in the box below. Answer = I ncreasing the price of small popcorn is inappropriate as it is elastic to price and would decrease the total revenue with increase in price. E. Was the decision to decrease the price of candy appropriate to increase total revenues? Why, or why not? Briefly explain in the box below. Answer = Decreasing the price of candy is appropriate as the price elasticity of demand for candy is elastic and decreasing the price will help to increase the total revenue. F. Was the decision to increase the price of hot dogs appropriate to increase total revenues? Why, or why not? Briefly explain in the box below. Answer = Hot dogs are inelastic of prices thus increasing the price will not affect the quantity demanded. As the demand for hot dogs is increasing regardless of the increase in price, the decision is appropriate. G. Was the decision to increase the price of movie tickets appropriate to increase total revenues? Why, or why not? Briefly explain in the box below.

Answer = Increasing the price of movie tickets is inappropriate, it is highly elastic to price and would affect the total revenue inversely.

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