Question

You are the manager of a movie theater that is the only one in a local market, so you have strong market power. You have extensively researched your customer base and realize you have two types of segmentable customers: (i) students who have an elasticity of demand for movies of -2.7 and (ii) senior citizens who have an elasticity of demand for movies of -5.1. Which of the following pricing schemes would you employ to enhance profits?a. Set higher prices to the students as their demand is relatively more elastic.b. Set higher prices to the students as their demand is relatively more inelastic.c. Set higher prices to the senior citizens as their demand is relatively more elastic.d. Set higher prices to the senior citizens as their demand is relatively more inelastic.

Answer 1

Answer: b. Set higher prices to the students as their demand is relatively more inelastic.

Explanation:

Price elasticity of demand measures the change in quantity demanded to changes in price levels.

If demand is inelastic, a small change in price has a small effect on quantity demanded. An inelastic demand usually has a coefficient of less than 1.

The elasticity of demand for students and senior citizens are both inelastic but that of the students is greater than that of senior citizens. They are less responsive to price changes when compared with senior citizens.