Sub: Economics

Topic: Micro Economics

Question: Optimal Pricing strategies of monopolies given demand function

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As a manager of a chain of movie theaters that are monopolies in their respective market, 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 functions is P = 24 0.006Q; on weekdays, it is P = 16 0.006Q. You acquire legal rights from movie producers to show their films at a cost of $20,000 per movie, plus a $4 royalty for each moviegoer entering you theaters (the average moviegoer in your market watches a movie only once). Devise a pricing strategy to maximize your firms profits.

Solution:
On weekends the inverse demand function is P= 24- 0.006Q On weekdays the inverse demand function is P= 16- 0.006Q Total cost for each movie theatre is TC= 20,000+ 4Q MC= d (TC) / dQ= 4 The firm can implement the price discriminating strategy and can charge different prices to different customers in weekends and weekdays.
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Sub: Economics

Topic: Micro Economics

Let the price charged by the movie theatre company to the movie goers during the weekends are P1 and the number of movie goers are Q1. Thus we can write, P1= 24- 0.006Q1 TR1= P1Q1 = 24Q1- 0.006Q12 MR1= 24- 0.012Q1 Profit will be at maximum where marginal revenue and marginal cost will be equal in both the markets. Equating MR1 with MC we get, 24- 0.012Q1 = 4 20= 0.012Q1 Q1 = 1666.66= 1667 (approx) Plugging the value in the demand equation we get, P1= 24- 0.006*1667= 24-10=14 They can charge $14 in the weekends Total revenue= 14* 1667= $23338 On weekdays the inverse demand function is P= 16- 0.006Q
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Sub: Economics

Topic: Micro Economics

The number of movie goers is Q2 and the price charged is P2 Thus we can write, P2= 16- 0.006Q2 TR2= P2Q2 = 16Q2- 0.006Q22 MR1= 16- 0.012Q2 If you like to download the complete solution, visit our solution library by copying to your browser the following link

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*The Homework solutions from ClassOf1 are intended to help the student understand the approach to solving the problem and not for
submitting the same in lieu of your academic submissions for grades.