Minimum wage

PED = (% Change in Quantity Demanded)/(% Change in Price). If a good has a PED < 1 then it is an inelastic good; demand is not sensitive to price changes. Namely if the price of the cinema tickets increases demand will stay the same, this is mainly due to the fact that the cinema doesn't have many substitutes. Although rental DVD's could account for the cinema they aren't the same. Therefore because the cinemas has a PED of -2.3 it his highly inelastic, thus consumers will continue visiting the cinema because there isn't anything good enough to act as its substitute. In response to a 10% increase in price, the quantity of a good demanded stays the same by -23% therefore the price elasticity of demand would be :

-23%/10% = -2.3

(ii) The cross elasticity of demand for visits to the cinema with respect to the rental payment of pre-recorded video films is +3.8

The cross elasticity of demand measures the quantity demanded for one good in response to a change in price of another good. Therefore if the price for cinema tickets decreases then demand for pre-recorded videos would decrease, similarly if the price of cinema tickets increased the demand for pre-recorded videos would increase. The cinema and rental videos are substitues of eacother, therefore they have an XED 0>, this is apparent as the XED of demand for visits to the cinema with repsec to the rental payment of pre-recorded video films is +3.8. This can be calculated by the formula used to calculate XED = (% Change in demand for good Y)/(% Change in price of good X ). Therefore if for example the % change in demand for good Y is 38% and the % change in price of good X is 10% then it would have a cross elasticity demand of +3.8.

(iii) the cross elasticity of demand for visits to the cinema with respect to the price of popcorn sold in the cinema is -1.0.

As explained previously for cross elasticity of demand an XED > 0 determines that the goods are substitutes, however in this case the cinema and popcorn are complements of each other because they have an XED < 0. The fact that they are complements reinforces the idea that if the price of popcorn increases the demand for the cinema will decrease, considering that when consumers go to the cinema they eat popcorn. Therefore if the price of one good increases the demand for the complement good decreases. If the cinema ticket prices increased, people wouldn't demand popcorn because without the cinema ticket they don't have access to the popcorn. An XED of -1.0 can be calculated through the formula XED = (% Change in demand for good Y)/(% Change in price of good X ). Therefore if the % change in demand for popcorn is 10% and the % change in the price of cinema tickets is -10% the XED will be -1.0.

(iv) What further economic information would the cinema company require in facing a decision to open more cinemas?

If one were to open more cinemas they would have to go through several steps that would help their business be successful. One evident factor in the decision to open more cinemas is where to open them; location. Considering that cinema tickets are luxury goods (elastic goods) in terms of income elasticity of demand, people that live in cities and work for businesses with a stable income tend to visit the cinema. Therefore placing a cinema in the middle of a farm area where there is a small population consisting of people with low and unstable incomes wouldn't bring in much money or demand, considering that the consumers in that area wouldn't be as willing and able to buy cinema tickets. Another important factor that relates to location is that there should be no rental stores near the cinema, considering that rental stores are the closest substitute to the cinema. Therefore the cinema should be located in a busy city that will attract not only rich people but also those who are willing and able to go to the cinema. The consequences of having rental stores around the cinema is that there will be more competition, thus rental stores will decrease the prices of their DVD's which would cause consumers to be more willing to buy cheaper DVD's that they can watch at home instead of giving more money to a cinema. Another important factor that one must consider before making more cinemas is the time in which they chose to set it up. For example during a recession people are more likely to refrain from watching movies and instead save their money for more important things like food and shelter. Additionally consumers are more likely to turn to rental video stores during a recession, if the DVD's are cheaper then cinema tickets. It is important to note that cinema tickets are elastic goods, therefore during a recession consumers invest in inelastic goods because they need them to survive. Therefore the aspects one must consider before making more cinemas are vital if they want to have a successful business. Building the cinemas in wealthy cities that lack rental stores, in an appropriate market where there is no recession are the two main factors one must think of.