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Players Theater Company

This analysis explores whether a theater company should consider cutting ticket prices. With only 200 seats filled in a typical performance out of 500, the PTC charges $30 per seat. The analysis examines demand function, elasticity, total revenue, factors influencing demand, and advanced issues.

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Players Theater Company

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  1. Players Theater Company • Should the theater cut prices? • The theater has 500 seats; about 200 are filled in a typical performance • The PTC has been charging $30/seat

  2. Demand Function • Q = f(X1, X2,…, Xn) • Example: Q = 117 – 6.6 P + 1.66Ps – 3.3 Pr + .0066I

  3. Demand Curve Ticket Pricein Dollars Income = $50,000 Price of Symphony tickets = $50 Price of meal at nearby restaurant = $40 60 30 Demand 200 Quantity of PTC Tickets 400

  4. Demand Curve Ticket Pricein Dollars Income = $50,000  $51,000 Price of Symphony tickets = $50 Price of meal at nearby restaurant = $40 61 60 30 200 Quantity of PTC Tickets 400 406.6

  5. Elasticity of Demand • Definition • η = -(% change in Q) / (% change in P) • Calculating

  6. Arc Elasticity Ticket Pricein Dollars 60 40 30 133 200 Quantity of PTC Tickets 400

  7. Estimates of Price Elasticities • Sugar = 0.31 • Potatoes = 0.31 • Tires = 1.20 • Electricity = 1.20 • Haddock = 2.20 • Movies = 3.70

  8. Total Revenue, Marginal Revenue • Total Revenue = P x Q • Marginal Revenue = the change in total revenue associated with selling one more unit of the product

  9. Ticket Price,Marginal Revenue In Dollars η > 1 η = 1 30 Demand Q Total Revenuein Dollars MR Total Revenue Q

  10. Other Factors Influencing Demand • Prices of related products • Complements vs. Substitutes • Defining a Market • Cross Price Elasticity of Demand

  11. Estimates of Cross Elasticities • Electricity and Natural Gas = 0.20 • Beef and Pork = 0.20 • Natural Gas and fuel oil = 0.44 • Margarine and Butter = 0.81

  12. Other Factors Influencing Demand • Income • Normal vs. Inferior goods • Income Elasticity of demand

  13. Estimates of Income Elasticities • Flour = -.36 • Natural Gas = 0.44 • Margarine = -0.20 • Milk = 0.07 • Dentist Services = 1.41 • Restaurant Consumption = 1.48

  14. Advanced Issues • Network Effects • Product Attributes • Product Life Cycles IndustryQuantityof output Intro Decline Growth Maturity Time

  15. Demand Estimation • Interviews • Price Experimentation • Statistical Analysis • Omitted Variables Bias • Multicollinearity • Identification Problem

  16. The Identification Problem • Suppose that this is a history of recent price and quantity changes in our industry:

  17. The Identification Problem Price in dollars 2005 29 2004 25 2006 22 Industry output In millions 4.5 5.25 7

  18. The Identification Problem Price in dollars D’ 2005 29 D 2004 25 S 22 Industry output In millions 4.5 5.25 7

  19. The Identification Problem Price in dollars D’ 2005 29 D 25 2006 S 22 S’ Industry output In millions 4.5 5.25 7

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