Unit VII Final Project
Unit III Assignment Worksheet
Background Information
The Ruby Red Movie Theater in town is in jeopardy of having to close its doors because it is
unable to generate enough total revenue. In an effort to generate more total revenue, the movie
theater manager decided to change the prices this month for drinks, popcorn, candy, hot dogs,
and movie tickets.
The manager would like for you to analyze the data that has been collected to help decide if the decisions to change the prices were correct and, if not, what should be done to prices to generate more total revenue. Be sure to answer all of the questions in this worksheet.
Question 1
Information regarding the community’s average income and movie ticket sales at the Ruby Red
Movie Theater for both last year and this year are presented below. Use this information when
answering questions A–C, below.
Last Year This Year
Community’s Average Income $55,800 $57,474
Movie Ticket Sales 4,980 5,021
A. Calculate the Income Elasticity of Demand for movie tickets. (Show your work. You can type it
in the box below, or write it out by hand, take a picture, and insert the picture in the box.
Make sure it fits in the box. NOTE: These options apply to all “Show your work” responses.)
∈d= ∆D /D ∆I /I
Where ∈dis the income elasticity of demand, ∆D /D is the change in quantity
demanded and ∆I /I is the change in income.
∈d=
$5021−$4980 $4980
X100
57474−$55800 $55800
X100
∈d= 0.8233% 3%
∈d=0.2744
B. Are movie tickets considered to be inferior goods, normal goods, or unit (unitary) goods in
this town? Explain why.
The Movie tickets are considered to be normal goods. This is because its income elasticity of demand is 0.27, this is between 0 and 1.
C. A new firm is relocating to the city and adding a large number of above average salaries. Will
the number of movie ticket sales for the theater increase, decrease, or remain constant?
Base your answer on information you answered in part B above.
The number of movie ticket sales for the theater will increase. This is because, normal goods have a positive income elasticity of demand. As the income rises, the demand rises at each price level.
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Question 2
The manager at Ruby Red Movie Theater decided to change the prices of concession stand items as well as tickets this month in an effort to increase revenues. Below, you are provided with prices for last month and this month as well as the quantities demanded for both months. Use this information when answering questions A–H below.
Price Quantity Demanded
Item Last
Month This
Month Last
Month This
Month
Large Drink $6.00 $5.50 150 161 Large Popcorn $7.50 $8.00 125 101 Small Drink $2.50 $2.00 75 80 Small Popcorn $5.00 $5.25 45 39 Candy $4.00 $3.50 57 68 Hot Dog $5.00 $5.25 35 36
Movie Ticket $8.00 $9.00 428 300
A. Calculate the total revenues earned by the theater last month and this month (Show your
work.)
Last moth Revenue = price x quantity demanded Revenue for each item Large drink=$6x150=$900, Large Popcorn=$7.50X125=$937.5, Small Drink= $2.50X75=$187.5, Small popcorn = $5X45=$225, Candy=$4X57=$228, Hot dog = $5X35=$175 Movie ticket=$8X428=$3424. Total revenue of all items =$900+$937.5+$187.5+$225+$228+$175+$3424=$6077.00
This month Revenue for each item Large drink=$5.5x161=$885.5, Large Popcorn=$8X101=$808, Small Drink= $2X80=$160, Small popcorn = $5.25X39=$24.75, Candy=$3.50X68=$238, Hot dog = $5.25X36=$189 Movie ticket=$9X300=$2700. Total revenue of all items =$885.5+$808+$160+$24.75+$238+$189+$2700=$5005.25
Total revenues last month = $6077.00
Total revenues this month = $5005.25
B. Calculate the price elasticity of demand for large drinks. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good and
dP/P is the price of the demanded good.
ep=
161−150 150
X100
$5.5−$6 $5.5
X100
ep= 7.33%
−8.33%
ep=−0.88
Is the price elasticity of demand for large drinks price elastic, inelastic, or unit (unitary)? Briefly
explain why in the box below.
Answer = Inelastic that is the price elasticity of demand is less than 1 and hence unresponsive
to change in price.
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C. Calculate the price elasticity of demand for large popcorn. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good
and dP/P is the price of the demanded good.
ep=
101−125 125
X100
$8−$7.5 $7.5
X100
ep= −19.2% 6.67%
ep=−2.88
Is the price elasticity of demand for large popcorn price elastic, inelastic, or unit (unitary)? Briefly
explain why in the box below.
Answer = Elastic that is the price elasticity of demand is greater than 1 and hence highly
responsive to change in price.
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D. Calculate the price elasticity of demand for small drinks. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good
and dP/P is the price of the demanded good.
ep=
80−75 75
X100
$2−$2.5 $2.5
X100
ep= 6.67% −20%
ep=−3.34
Is the price elasticity of demand for small drinks price elastic, inelastic, or unit (unitary)? Briefly
explain why in the box below.
Answer = Elastic that is the price elasticity of demand is greater than 1 and hence highly
responsive to change in price.
Continue on next page
E. Calculate the price elasticity of demand for small popcorn. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good
and dP/P is the price of the demanded good.
ep=
39−45 45
X100
$5.25−$5 $5
X100
ep= −13.33% 5%
ep=−2.67
Is the price elasticity of demand for small popcorn price elastic, inelastic, or unit (unitary)? Briefly
explain why in the box below.
Answer = Elastic that is the price elasticity of demand is greater than 1 and hence highly
responsive to change in price.
Continue on next page
F. Calculate the price elasticity of demand for candy. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good
and dP/P is the price of the demanded good.
ep=
68−57 57
X100
$3.5−$4 $4
X100
ep= 19.30% −12.5%
ep=−1.54
Is the price elasticity of demand for candy price elastic, inelastic, or unit (unitary)? Briefly explain
why in the box below.
Answer = Elastic that is the price elasticity of demand is greater than 1 and hence highly
responsive to change in price.
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G. Calculate the price elasticity of demand for hot dogs. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good
and dP/P is the price of the demanded good.
ep=
36−35 35
X100
$5.25−$5 $5
X100
ep= 2.86% 5%
ep=0.57
Is the price elasticity of demand for hot dogs price elastic, inelastic, or unit (unitary)? Briefly
explain why in the box below.
Answer = Inelastic that is the price elasticity of demand is less than 1 and hence unresponsive
to change in price.
Continue on next page
H. Calculate the price elasticity of demand for movie tickets. (Show your work.)
ep= dQ/Q dP/P
Where ep is the price elasticity, dQ/Q is the quantity of the demanded good
and dP/P is the price of the demanded good.
ep=
300−428 428
X100
$9−$8 $8
X100
ep= −29.91% 12.5%
ep=−2.39
Is the price elasticity of demand for movie tickets price elastic, inelastic, or unit (unitary)? Briefly
explain why in the box below.
Answer = Elastic that is the price elasticity of demand is greater than 1 and hence highly
responsive to change in price.
Continue on next page
Question 3
Based on the relationship between price elasticity of demand and total revenues, evaluate whether the individual price changes the manager made were correct or not. Remember, Ruby Red Movie Theater wants to increase total revenue.
A. Was the decision to decrease the price of large drinks appropriate to increase total revenues?
Why, or why not? Briefly explain in the box below.
Answer = No, the coefficient of PED is 0.88 less than 1, the demand is inelastic, decreasing the
price leads to a decrease in total revenues, and this means he lost revenues
revenue.
B. Was the decision to increase the price of large popcorn appropriate to increase total
revenues? Why, or why not? Briefly explain in the box below.
Answer = No, the coefficient of PED is 2.88 greater than 1, the demand is elastic, increasing
the price leads to a decrease in total revenues, so he lost more revenues.
C. Was the decision to decrease the price of small drinks appropriate to increase total revenues?
Why, or why not? Briefly explain in the box below.
Answer = Yes, the coefficient of PED is 3.34 greater than 1, the demand is elastic, decreasing
the price leads to an increase in total revenue, so he gained more revenues.
D. Was the decision to increase the price of small popcorn appropriate to increase total
revenues? Why, or why not? Briefly explain in the box below.
Answer = No, the coefficient of PED is 2.67 greater than 1, the demand is elastic, increasing
the price leads to a decrease in total revenue, so he lost revenues.
E. Was the decision to decrease the price of candy appropriate to increase total revenues?
Why, or why not? Briefly explain in the box below.
Answer = Yes, the coefficient of PED is 1.54 greater than 1, the demand is elastic, decreasing
the price leads to an increase in total revenue, so he gained revenues.
F. Was the decision to increase the price of hot dogs appropriate to increase total revenues?
Why, or why not? Briefly explain in the box below.
Answer = Yes, the coefficient of PED is 0.57 less than 1, the demand is inelastic, the increasing
the price leads to an increase in total revenue, he gained revenues
G. Was the decision to increase the price of movie tickets appropriate to increase total
revenues? Why, or why not? Briefly explain in the box below.
Answer = No, the coefficient of PED is 2.39 greater than 1, the demand is elastic, increasing
the price leads to a decrease in total revenue, so he lost revenues.