The Collegetown movie theater serves 900 students and 100...

The Collegetown movie theater serves 900 students and 100 professors in town. Each student's willingness to pay for a movie ticket is $\$ 5 .$ Each professor's willingness to pay is $\$ 10 .$ Each will buy only one ticket. The movie theater's marginal cost per ticket is constant at $\$ 3,$ and there is no fixed cost. a. Suppose the movie theater cannot price-discriminate and charges both students and professors the same price per ticket. If the movie theater charges $\$ 5,$ who will buy tickets and what will the movie theater's profit be? How large is consumer surplus? b. If the movie theater charges $\$ 10,$ who will buy movie tickets and what will the movie theater's profit be? How large is consumer surplus? c. Assume the movie theater can price-discriminate between students and professors by requiring students to show their student ID, charging students $\$ 5$ and professors $\$ 10$, how much profit will the movie theater make? How large is consumer surplus?

The Collegetown movie theater serves 900 students and 100 professors in town. Each student's willingness to pay for a movie ticket is $\$ 5 .$ Each professor's willingness to pay is $\$ 10 .$ Each will buy only one ticket. The movie theater's marginal cost per ticket is constant at $\$ 3,$ and there is no fixed cost.
a. Suppose the movie theater cannot price-discriminate and charges both students and professors the same price per ticket. If the movie theater charges $\$ 5,$ who will buy tickets and what will the movie theater's profit be? How large is consumer surplus?
b. If the movie theater charges $\$ 10,$ who will buy movie tickets and what will the movie theater's profit be? How large is consumer surplus?
c. Assume the movie theater can price-discriminate between students and professors by requiring students to show their student ID, charging students $\$ 5$ and professors $\$ 10$, how much profit will the movie theater make? How large is consumer surplus?

Key Concepts

Marginal Cost

Marginal cost is the cost of producing one additional unit of a good or service. It is a crucial element in decision-making processes because it helps determine the additional expense incurred from selling extra units, which in turn affects pricing, production levels, and overall profit maximization strategies.

Profit Maximization

Profit maximization involves setting prices and output levels in such a way that the difference between total revenue and total cost is as high as possible. It usually entails analyzing how different pricing strategies affect both revenue and costs, taking into account factors such as marginal cost and consumer demand, in order to determine the optimum pricing approach.

Price Discrimination

Price discrimination is the practice of charging different prices to different groups of consumers based on their varying willingness or ability to pay. By segmenting the market, a firm can capture a larger portion of consumer surplus and convert it into additional profit, especially when the seller can easily identify or verify which segment a consumer belongs to.

Uniform Pricing

Uniform pricing refers to the strategy of charging a single price to all consumers regardless of differences in their individual willingness to pay. In markets where consumers have different reservation prices, uniform pricing leads the firm to set a single price that might capture some but not all of the potential consumer surplus, potentially leaving money on the table from higher-value buyers.

Consumer Surplus

Consumer surplus is the economic benefit that consumers receive when they pay a price lower than what they are willing to pay. It is measured as the difference between the maximum price a consumer is prepared to pay and the actual price paid for a product, and it serves as an indicator of the overall benefit or welfare that consumers gain from market transactions.

Transcript

00:02 The movie theater in college town has two kinds of customers, 900 students that are willing to pay $5 for a movie, and 100 professors willing to pay 10.

00:15 And their marginal cost is $3.

00:19 The first thing we want to know is suppose we can't use price discrimination.

00:24 Everybody pays $5 for a ticket.

00:28 Who will buy tickets and what will the...

00:30 Profit big and how much consumer surplus will we have.

00:35 So at $5 a ticket, a thousand people will buy tickets because the students are willing to pay $5 and the professors are willing to pay even more.

00:46 So our profit would be $1 ,000 people paying $5 each.

01:04 Our cost on a thousand tickets, since our marginal cost is always $3.

01:10 That's our average cost as well.

01:13 And so our profit would end up being $5 ,000 less $3 ,000.

01:19 Our profit will be $2 ,000.

01:27 So how much consumer surplus would we have? well, the students, consumer surplus, we'll call it sub s, where the students would be zero.

01:36 And the reason is the price is $5 and that's what they're willing to pay.

01:42 Remember, consumer surplus is the difference between what you pay and what you're willing to pay.

01:48 So the consumer surplus for the professors, though, would be $5 because they're willing to pay 10, and they only have to pay five...

Please give Ace some feedback