A Broadway play company can only charge one price for tickets to a given performance of its play. The company manager notices that the company earns greater total revenue when they charge a higher ticket price and its theater is three-quarters full than when they charge a lower ticket price and the theater is completely full. It follows that demand for this play is:

(A) perfectly elastic

(B) inelastic

(C) unit elastic

(D) elastic

(B) inelastic

Explanation:

Price elasticity of demand is a measure of the sensitivity of demand for a good or service to changes in the price of that product. We say that the price elasticity of demand is elastic when a percentage change in the price of this good has major impacts on demand. On the contrary, we say that the price elasticity of demand is inelastic when variations in the price of goods have little or no influence on demand.

In the case described, the increase in price does not substantially decrease the demand for theater tickets. Consumers keep demanding and the theater manager can maximize profit. Thus, we say that the demand for theater tickets is inelastic (low sensitivity) to price variations.

Plus: In the example, demand declined slightly due to price changes. If price variation kept the theater crowded, we would say that the demand for theater would be perfectly inelastic to price variations, that is, there would be no sensitivity.