A movie theater is a local monopolist. It sells the same movie ticket to seniors and to adults, and it checks IDs to prevent resale. Demand for seniors is relatively more price elastic than demand for adults. The theater sets a senior ticket price of $8 and an adult ticket price of $14. Based on the monopolist's pricing strategy, which group is charged the higher price and why?
- Adults, because the adult market has less elastic demand (correct answer)
- Seniors, because the senior market has less elastic demand
- Adults, because the adult market has more elastic demand
- Seniors, because the senior market has more elastic demand
- Neither, because charging different prices requires identical elasticities
Explanation: Price discrimination is a key pricing strategy in microeconomics where a monopolist charges different prices for the same good to capture more consumer surplus. Third-degree price discrimination involves segmenting identifiable groups and charging based on their demand elasticities. Adults have less elastic demand than seniors, so they are willing to pay more without significantly reducing quantity demanded. The correct answer is that adults pay the higher price because their market has less elastic demand, allowing the theater to extract more surplus. A common misconception is reversing elasticities, thinking more elastic groups pay more, but actually, less elastic groups face higher markups. A transferable strategy is to charge higher prices to consumers with less elastic demand to maximize profits. Always check if arbitrage is prevented, as resale would undermine the price differences.