Oak entertainment is the only movie theater in a small town

Question # 00005731 Posted By: vikas Updated on: 12/23/2013 11:29 PM Due on: 12/31/2013
Subject Economics Topic General Economics Tutorials:
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1. Oak entertainment is the only movie theater in a small town. The firm can screen movies at a constant average and marginal cost of AC = MC = 10. The firm faces a demand curve given by: Q = 100-P and a marginal revenue curve of MR = 100-2Q

a) Calculate the firms profit maximizing price and output combinations. What are the firm’s profits?

b) Suppose the firm decided to charge the (maximum) willingness to pay for each movie ticket? How many tickets would it sell now, and how much profit would it make?

c) Suppose the firm’s management decides it would be too cumbersome to try and estimate the willingness to pay for each ticket, as in plan (a) above. Instead, they opt to sell, for a fixed fee, an “Oak Movies Club Pass”. They will also charge an additional ticket (price) per movie (not necessarily the same price as in (a) above). Assume that everyone will need a club pass to see the movies.

i. How much (in total) would the firm have to collect from the Club Pass (total fixed fee) in order to maximize profits?
ii. How much would the “additional ticket (price) per movie” be, to maximize profits with this plan?
iii. How much profit would the firm make with this plan – combining a fixed club fee and an additional ticket per movie?

d) How does the profit the firm makes with the plan in (b) and the profit it makes with the plan in (c) compare. Give a brief explanation of this comparison.
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