Question

If the demand for drive-in movies is more elastic for couples than for single individuals, it will be optimal for theaters to charge one admission fee for the driver of the car and an extra fee for passengers. True or false? Explain.

Short answer

True. Given the higher elasticity for couples, it's financially advantageous for theaters to charge a base fee for the driver and an extra fee for passengers. This approach ensures a more equitable division of price, discouraging no one due to high prices while also generating extra income.

Step-by-step solution

Understand Elasticity

Price elasticity of demand measures how much the quantity demanded of a good responds to a change in the price of that good. It's said to be elastic when a small change in price leads to a large change in quantity demanded, and inelastic when a small change in price leads to a small change in quantity demanded.

Contextualize Elasticity in the Scenario

In this scenario, we're told that the demand for drive-in movies is more elastic for couples than for single individuals. This means that couples are more likely to reduce their demand if there is a price increase; they're more responsive to changes in price compared to single individuals.

Analyzing Optimal Pricing Strategy

Given that couples are more responsive to changes in price (their demand is more elastic), theaters could optimize their pricing by charging one admission fee for the driver and an extra fee for passengers. This way, they don't deter couples from coming, due to a higher overall price for two, but still manage to generate extra income from the passenger fee. In this case, people who come in couples will still come but will pay slightly more, leading to increased revenue for the theaters.

Key concepts

Elastic and Inelastic Demand

Understanding the difference between elastic and inelastic demand is crucial for both consumers and businesses. Elastic demand occurs when consumers are highly sensitive to price changes. In simpler terms, if the price of a movie ticket increases by a small percentage, and a couple decides to stop going to the drive-in theater, then their demand is elastic. On the contrary, inelastic demand is where consumers are less sensitive to price changes; for instance, if a single person continues to attend even after a ticket price hike, their demand is inelastic.

Factors that influence demand elasticity include the availability of substitutes, the portion of a person’s budget spent on the good, and the time frame for purchase decision. For drive-in movies, couples may have alternative date options like dining out or streaming a movie at home, leading to more elastic demand. It's essential for businesses to identify if their product or service has elastic or inelastic demand as this insight drives critical pricing and marketing strategies.

Optimal Pricing Strategy

Crafting an optimal pricing strategy requires a deep understanding of how different groups of consumers react to price changes. For a drive-in theater, price sensitivity varies between couples and single attendees. Identifying this variance allows the theater to implement a pricing structure that maximizes profitability without losing customers. Charging a flat fee for the driver (a single individual, presumably with inelastic demand) and an additional fee for passengers (couples with elastic demand) is an example of price discrimination.

This strategy allows the theater to attract both customer groups effectively. They avoid raising prices too much for couples, which could lead to a significant drop in attendance, while still generating additional revenue from passengers. It's a balance between maintaining a customer base and increasing revenue, and it hinges on correctly assessing the elasticity of demand for different market segments.

Quantity Demanded

The concept of quantity demanded refers to the total amount of a good or service that consumers are willing and able to purchase at a given price over a specified period. It is inversely related to price for most goods—when prices rise, quantity demanded usually falls, and vice versa. This relationship is depicted on the demand curve, which is typically downward sloping.

In our drive-in movie case, the quantity demanded by couples is sensitive to price changes, and hence their attendance can significantly fluctuate with varying prices. A theater's revenue is dependent on the number of attendees (quantity demanded), so understanding the factors that influence this number is vital for setting up ticket prices that won't discourage attendance. By pricing intelligently, the theater ensures that each car coming through the gates represents maximized potential revenue while keeping the number of cars steady or increasing.