Cinema Theater has estimated the following demand functions for its movies: Daytime demand, QD =...

Question

Cinema Theater has estimated the following demand functions for its movies:   Daytime demand, QD = XXXXXXXXXXPDNighttime demand, QN = XXXXXXXXXXPNThe marginal cost of serving another customer is $5 and its fixed costs are $100.a. If the theater uses third degree price discrimination, what price will it charge for daytime tickets? How many will be sold?b. If the theater uses third degree price discrimination, what price will it charge for nighttime tickets? How many will be sold?c. What is the profit associated with using third degree price discrimination?d. If the theater does not use price discrimination and charges the same price to all customers, what is that price and how many tickets will be sold?e. What happens to profit when the theater does not engage in third degree price discrimination? How much does it rise or fall?2. Discuss ways firms establish barriers to entry and explain how they benefit firms but not consumers. Give an example of a law or regulation that limits the ability of firms to establish barriers to entry and an example of a law or regulation that helps firms establish barriers to entry.3. Big Steel Corp. is a price leader in the local steel market. The other, smaller manufacturers set their price based on that established by Big Steel. Discuss how Big Steel should use the information on the supply of steel by other, smaller competitors when it determines its profit maximizing price.4. Explain how market structure affects market performance and conduct. Identify three types of government regulation that help to improve market performance and conduct and explain how each regulation achieves its objectives and the economic justification for the regulations.
	
Document Preview: Cinema Theater has estimated the following demand functions for its movies: Daytime demand, QD = XXXXXXXXXXPD  Nighttime demand, QN = XXXXXXXXXXPNThe marginal cost of serving another customer is $5 and its fixed costs are $100.a. If the theater uses third degree price discrimination, what price will it charge for daytime tickets? How many will be sold?b. If the theater uses third degree price discrimination, what price will it charge for nighttime tickets? How many will be sold?c. What is the profit associated with using third degree price discrimination?d. If the theater does not use price discrimination and charges the same price to all customers, what is that price and how many tickets will be sold?e. What happens to profit when the theater does not engage in third degree price discrimination? How much does it rise or fall?  2. Discuss ways firms establish barriers to entry and explain how they benefit firms but not consumers. Give an example of a law or regulation that limits the ability of firms to establish barriers to entry and an example of a law or regulation that helps firms establish barriers to entry. 3. Big Steel Corp. is a price leader in the local steel market. The other, smaller manufacturers set their price based on that established by Big Steel. Discuss how Big Steel should use the information on the supply of steel by other, smaller competitors when it determines its profit maximizing price.4. Explain how market structure affects market performance and conduct. Identify three types of government regulation that help to improve market performance and conduct and explain how each regulation achieves its objectives and the economic justification for the regulations.

David · Accepted Answer

Q1. Cinema Theatre has estimated the following demand functions for its movies:
Daytime demand, QD = 400 - 50 PD 
Night time demand, QN = 200 - 20 PN
The marginal cost of serving another customer is $5 and its fixed costs are $100.
a. If the theatre uses third degree price discrimination, what price will it charge for daytime tickets? How many will be sold?
Equate MC with MR for day demand
MR= (400-2Q)/50
MC= 5
400 – 2Q= 250
Q= 150/2 =75
P= (400-75)/50 = 6.5
b. If the theatre uses third degree price discrimination, what price will it charge for night time tickets? How many will be sold?
Equate MC with MR for nite demand
MR= (200-2Q)/20
MC= 5
200 – 2Q= 100
Q= 100/2 =50
P= (400-50)/20 = 17.5
c. What is the profit associated with using third degree price discrimination?
TR= 17.5 *50  + 6.5*75 
TC= 100+125*5 
Profits = 637.5
d. If the theatre does not use price discrimination and charges the same price to all customers, what is that price and how many tickets will be sold?
Total demand = Qt =600-70P
MRt= (600-2Qt)/70 
MC = 5
So 600-2Qt = 70*5 = 140
Qt = 230
P= (600-230)/70 =5.28
e. What happens to profit when the theatre does not engage in third degree price discrimination? How much does it rise or fall?
profits = 230*5.28  - 230*5 -100 = 84
profits fall by 637.5 -84 =553.5
2. Discuss ways firms establish barriers to entry and explain how they benefit firms but not consumers. Give an example of a law or regulation that limits the ability of firms to establish barriers to entry and an example of a law or regulation that helps firms establish barriers to entry. 
An effective way used by firms to erect entry barriers is to invest in large capacities, even though the firm may not be utilising this high capacity in normal circumstances. It is used when a new entrant threatens to enter the market and reduce profits for the incumbent as the market will now be shared by both firms. High capacity allows the incumbent firm to lower prices as its own average costs are lower as output is expanded. Such lower prices can only be offered by the incumbent as its average cost decline due to high capacity levels. The new firm will not be able to offer the low prices profitably. The ensuing price war will force entrant to back off and leave the industry as it incurs losses due to the offer of lower prices from rival and incumbent firm.

Cinema Theater has estimated the following demand functions for its movies: Daytime demand, Q D = XXXXXXXXXXP D Nighttime demand, Q N = XXXXXXXXXXP N The marginal cost of serving another customer is...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment