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1 April, 13:06

As a manager of a chain of movie theaters that are monopolies in their respective markets, you have noticed much higher demand on weekends than during the week. You therefore conducted a study that has revealed two different demand curves at your movie theaters. On weekends, the inverse demand function is P = 20 - 0.001Q; on weekdays, it is P = 15 - 0.002Q. You acquire legal rights from movie producers to show their films at a cost of $25,000 per movie, plus a $2.50 "royalty" for each moviegoer entering your theaters (the average moviegoer in your market watches a movie only once). What type of pricing strategy should you consider in this case?

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  1. 1 April, 14:09
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    The best strategy will be to do price distrimination and charge

    weekends: $ 11.25 per ticket

    weekdays: $ 8.75 per ticket

    Explanation:

    we should look up for the price for each type of demand considering

    Marginal Revenue = Marginal Cost

    weekends

    P = 20 - 0.001Q

    revenue P x Q = (20-0.001Q) xQ

    revenue = 20q-0.001q^2

    marginal revenue is the derivate of the revenue function

    it represent the revenue generate for an adidtional unit:

    dR/dQ = - 0.002q + 20

    Cost 25,000 + 2.5Q

    Marginal cost: cost for an additional unit

    dC/dQ = 2.5

    We equalize:

    2.5 = 20 - 0.002q

    q = 17.5/0.002 = 8,750

    price = 20-0.001Q = 20 - 0.001 (8,750) = 20 - 8.75 = 11,25

    weekdays

    we do the same procedure:

    revenue = (15-0.002Q) xQ = 15Q-0.002Q^2

    marginal revenue = 15-0.004Q

    the cost function is the same so the marginal cost too.

    now MR = MC

    2.5 = 15-0.004Q

    Q = 12.5/0.004 = 3,125

    P = 15-0.002 (3,125) = 15 - 6.25 = 8.75
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