Profit maximization at the World Cup Soccer Final
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You have been hired by FIFA to advise on the pricing of tickets for the World Cup Final on 11th July 2010 to be played at Soccer City Johannesburg, a stadium with seating capacity of 88,460. You have been told that the objective is to set a ticket price that will maximise total revenue, given that the marginal cost of an extra spectator is zero. From the demand curve you calculate that revenue is maximised at a ticket price of $200 and that total demand at this price is 80,000, leaving 8,460 seats unsold. Assuming all this information is correct, discuss whether there are ways in which ticket revenues could be increased. (50%)
b) Could FIFA increase its total revenues by selling tickets at prices below the ticket revenue maximising level? Would this also be profit maximising? (50%)
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Solution Summary
This solution illustrates profit maximization by the Marginal Revenue = Marginal Cost method. The context is FIFA trying to sell out the World Cup Soccer Final game. The solution presents strategies, including price discrimination, that FIFA could use to sell additional tickets and increase revenue.
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a) Under the Marginal Revenue - Marginal Cost profit maximization theory, maximum profit occurs at the quantity where Marginal Revenue equals Marginal Cost. The seller should therefore set the unit price at the level on the Demand curve corresponding to that quantity. In this example we are told that Marginal Cost is equal to zero. In the diagram, the Marginal Cost (MC) curve would lie along the x-axis. Marginal Revenue equals Marginal Cost when Marginal Revenue is equal to zero. We are told that this occurs at a quantity of 80,000 ...
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