Question

You live in a town with 300 adults and 200 children, and you are thinking about putting on a play to entertain your neighbors and make some money A play has a fixed cost of $2,000, but selling an extra ticket has zero marginal cost. Here are the demand schedules for your two types of customers:

 

Answer 1

It is given that there are 300 adults and 200 children in town. The person thinks of earning money by entertaining the people of town. Sine there is no variable cost, the profit-maximizing outcome is the point where the total revenue earned is maximum. The table below shows the value of total revenue earned: (Children) TR Price 10 Adult 100 200 300 300 300 300 300 300 300 300 0 900 1600 2100 1800 1500 1200 900 600 300 0 0 0 0 0 100 200 200 200 200 200 0 500 800 600 400 200 0 It is clear from the above table that the person should charge $7 for an adult's ticket and 4 for child's ticket as the revenue is maximum at that point only. Profit is the excess of revenue over costs. Following is the calculation of profit Profit TR-TC ($7x 300)+ (S4x200)-S2,000 - $2,100+$800 -$2,000 $900 Thus, the profit will be S900 If the city council passes a law that restricts the producer from charging different prices then the producer set a price of S7 for all tickets as t gives him the highest level of revenue (combined) Profit is the excess of revenue over costs. Following is the calculation of profit:

Profit TR-TC (S7x 300) (S7x0)-S2,000 $2, 1 00-$2,000 $100 Thus, the profit will be $100 As a result of law, The adults are neither better off nor worse off, that is, unchanged Children are worse off because they are now not able to watch the play anymore as the highest willingness to pay is $5 which is less than the current market price, that is, $7 Producers are worse off because the profit falls due to imposition of law Now suppose the fixed cost rises to $2,500 rather than $2,000. It means the price charged will not change. the only thing that changes is the profit In the presence of price discrimination, the adult price of a ticket would be S7 and the child price would be S4. Total profits would fall to S400 (Calculation is shown below) Profit TR-TC ($7x 300)+ (S4x200)-S2,500 $2,100+ $800 -$2,500 $400 If price discrimination were banned and the monopolist continued to produce the play no matter what the profit, the price of ticket would be S7, and total profit decreases to S400, Following is the calculation of profit Profit TR-TC ($7x300)-($7x0)-$2,500 - $2,100- $2,500 -$400