To conduct an experiment AMC increased movie ticket prices f

To conduct an experiment, AMC increased movie ticket prices from $9.00 to $10.00 and measured the change in ticket sales. Using the data over the following month, they concluded that the increase was profitable. However, over the subsequent months, they changed their minds and discontinued the experiment. How did the timing affect their conclusion about the profitability of increasing prices?

Solution

In short-run, demand for a product is generally inelastic where as in long-run, demand for a product is generally elastic.

When demand for a product is inelastic, increase in price results in increase in total revenue and thereby profit. On the other hand, when demand for a product is elastic, increase in price results in decrease in total revenue and thereby profit.

As we can see that AMC has kept the experiment of raising price of movie tickets continued for a small-time period. Subsequently as time period has increased they had discontinued the experiment.

This points towards the fact that initially for some time period as AMC raised the price of tickets, demand has remained inelastic due to various reasons like lack of immediate substitution by movie-goers etc and that has resulted in higher revenue and profit. However, as time period increased, demand became more elastic as substitution occured leading to fall in total revenue and profit.

Thus, timing by impacting the elasticity and thereby total revenue and profit impacted the conclusion of AMC about the profitability of increasing prices.