You are Marketing Manager for Regal Entertainment, the largest movie-chain company in the United States. You know
Question:
You are Marketing Manager for Regal Entertainment, the largest movie-chain company in the United States. You know that the number of movie tickets sold by Regal (“quantity demanded”) in any year depends on the price that Regal charges (dollars per ticket) and on the average income of movie‑goers (dollars per year. You instruct your staff to collect information on these variables over the past three years. The staff presents you with the following table.
| Year | Price (dollars per ticket) | Average Income (thousands of dollars per year) | Quantity Demanded (millions of tickets per year) |
| 2013 | 12 | 48 | 20 |
| 2014 | 8 | 48 | 40 |
| 2015 | 8 | 72 | 50 |
How to read the table: In 2013, price is $12 per ticket and average income is $48 thousand, causing quantity demanded to be 20 million tickets. Similarly for 2014 and 2015.
1.(a) Define price elasticity. Using the midpoint method, compute price elasticity when Regal reduces price from $12 to $8. Show your computation. [Hint: Price elasticity involves a movement along a given, stable, fixed demand curve.]
(b) To what fixed level of average income does this elasticity pertain?
(c) If Regal were to reduce price, would total revenue increase, decrease, or remain unchanged? Explain your answer.
(d) If Regal were to increase price, would total revenue increase, decrease, or remain unchanged? Explain your answer.
2.(a) Using the midpoint method, compute price elasticity when Regal increases price from $8 to $12. Show your computation.
(b) To what fixed level of average income does this elasticity pertain?
3.(a) Define income elasticity. Using the midpoint method, compute income elasticity when income increases from $48 thousand to $72 thousand. Show your computation. [Hint: Be careful to use the correct rows.]
(b) Are Regal movie tickets a normal good or an inferior good? Explain your answer.
4.(a) Define cross-price elasticity of demand for movie tickets with respect to the price of popcorn. Is this elasticity likely positive or negative? Explain your answer.
(b) Explain why, based on the above table, you cannot compute this cross-price elasticity of demand.
Expert Answer:
