ECO 321 – Price Discrimination Assignment

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Price Discrimination Assignment

A movie theatre has a cost function which entails the rent of the commercial building of $50 per day (fixed cost) and a marginal cost of $5 per viewer. There are eight potential viewers (four of them are students and four of them are not) with buyer values given in the table below

Students

Others

$19

$22

$13

$18

$11

$16

$3

$10

Assume that the movie theater cannot price discriminate and has to decide on the price it charges all viewers. Create a table in which you represent the price, the corresponding quantity demanded, the total revenue, the marginal revenue, the marginal cost, and the profit of the movie theater.

Determine the optimal price of a movie ticket and the profit of the movie theater in the short run if the seller does not price discriminate. What is the optimal decision of the movie theater in the short run and in the long run about staying or exiting the business? Explain how you reached your conclusion.

Assume now that the movie theatre can give price discounts to students. Explain the concept of price discrimination and the type of price discrimination in the context of the current example. Is this direct or indirect price discrimination? Explain the market conditions which allow sellers to price discriminate (discuss in detail at least three conditions).

Determine the optimal ticket prices for students and for others. Determine the revenue of the movie theatre. Determine the optimal decision of the movie theatre in the short and in the long run. Explain your approach.

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