Industrial Organization-Homework 1 Due date: Sep. 21, Friday (class time) 1. Sup
ID: 1136155 • Letter: I
Question
Industrial Organization-Homework 1 Due date: Sep. 21, Friday (class time) 1. Suppose the demand for Netflix is given by number of Netflix subscriptions, py is the price of a Netfix plan, and pr is the where gv is the price of a Hulu plan. (a) What is the price elasticity of Netflix subscriptions? (b) Suppose a- 500, bN 10, by 5, and py50. What are Netflix's demand elasticity and cross-price elasticity? Are products of Hulu and Netflix substitutes or complements? (e) How much do consumers get in surplus at these prices? 2. Music Vent million 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. ures sells a very popular MP3 player, the MP34u. The firm currently sells one unites for a price of $100 each. Marginal cost is estimated to be constant at $40, where (a) Should the firm raise price, lower price, or leave price unchanged? Explain you answer.Explanation / Answer
1) Using the values the demand function becomes qN = 750 - 10pN
a) Price elasticity is given by ed = slope of the demand function with respect to own price x price quantity. Hence we have ed = -bN * pN / qN
b) Demand elasticity = -10 * 50 / (500 – 10*50 + 5*50) = -2.
Cross price elasticity = bH * pH / qN = 5 * 50/250 = 1. Since CPE is positive, the two goods are substitutes.
c) Consumer surplus = 0.5*(max price of pN – current pN)*current qN = 0.5*(75 – 50)*250 = $3125
2) Since demand is relatively elastic, the firm should reduce the price because then it can raise its revenue.