Suppose the demand for Netflix is given by qN =a−bNpN +bHpH (1) where qN is the number of Netflix subscriptions, pN is the price of a Netfilx plan, and pH is the price of a Hulu plan.
1. Suppose the demand for Netflix is given by qN =a−bNpN +bHpH (1) where qN is the number of Netflix subscriptions, pN is the price of a Netfilx plan, and pH is the price of a Hulu plan.
(a) What is the price elasticity of Netflix subscriptions? (Hint: Use the definition of elasticity in Theorem 1 below)
(b) Suppose a = 500, bN = 10, bH = 5, and pN = pH = 50. What are Netflix’s demand elasticity and cross-price elasticity? Are products of Hulu and Netflix substitutes or complements?
(c) How much do consumers get in surplus at these prices?
2. Music Ventures sells a very popular MP3 player, the MP34u. The firm currently sells one million unites for a price of $100 each. Marginal cost is estimated to be constant at $40, where as average cost (at the output level of one million units) is $90. The firm estimates that its demand elasticity (at the current price level) is approximately -2.
(a) Should the firm raise price, lower price, or leave price unchanged? Explain you answer.
Theorem 1 (own-price elasticity and cross-price elasticity) Suppose the demand function for some good is Q = β0 + β1p + β2p ?,
where β0, β1, β2 are constant numbers, Q is the quantity demanded, p is its price, and p ? is the price of another good. Then the own-price elasticity is ε = β1p/q, 1 and the cross-price elasticity is ε ? = β2p ?/q
3. Las-O-Vision is the sole producer of holographic TVs, 3DTVs. The weekly demand for 3DTVs is q = D(p) = 10200 − 100p (2)
The cost of producing q 3DTVs per week is q2/2 (note this implies that MC = q).
(a) What is Las-O-Vision’s total revenue schedule?
(b) What is Las-O-Vision’s marginal revenue schedule?
(c) What is the profit-maximizing number of 3DTVs for Las-O-Vision to produce each week? What price does Las-O-Vision charge per 3DTV?
Theorem 2 (Relationship between total revenue and marginal revenue) Suppose the total revenue function TR(q) is
TR(q) = a + bq + cq2,
where a,b,c are constant numbers. Then the marginal revenue function MR(q) is MR(q) = b + 2cq. Theorem 3 (Relationship between total cost and marginal cost)
Suppose the total cost function TC(q) is
TC(q) = a + bq + cq2,
where a,b,c are constant numbers. Then the marginal cost function MC(q) is MC(q) = b + 2cq.
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