Problem 1. 6.8 from Cabral: Sal’s satellite company broadcasts
TV to subscribers in LA and NY. Demand functions are
QNY=50-(1/3)PNY
QLA=80-(2/3)PLA
where Q is in thousands of subscriptions per year and P is the
subscription price per year.
The cost of providing Q units of service is given by
TC=1000+30Q,
where Q= QNY + QLA.
- a) What are the profit-maximizing prices and quantities for
the NY and LA markets?
- b) As a consequence of a new satellite that the Pentagon
developed, subscribers in LA are now able to get the NY
broadcast and vice versa so Sal can charge only a single
price. What is the profit-maximizing single price that he
should charge?
- c) In which situation is Sal better off? In terms of
consumers’ surplus which situation do people in LA prefer
and which do people in NY prefer? Why?
Problem 2. 6.10 from Cabral: SpokenWord: Your software company
has just completed the first version of Spoken Word, a voice-
activated word processor. As marketing manager, you have to
decide on the pricing of the new software. You commissioned a
study to determine the potential demand for SpokenWord. From
this study, you know that there are essentially two market
segments of equal size, professionals and students (one million
each). Professionals would be willing to pay up to $400 and
students up to $100 for the full version of the software. A
substantially scaled-down version of the software would be worth
$50 to students and worthless to professionals. It is equally
costly to sell any version. In fact, other than the initial
development costs, production costs are zero. Although you know
there are two market segments, you cannot directly identify a
consumer as belonging to a specific market segment.
(a) What are the optimal prices for each version of the
software?
Suppose that, instead of the scaled-down version, the firm sells
an intermediate version that is valued at $200 by professionals
and $75 by students.
(b) What are the optimal prices for each version of the
software? Is the firm better off by selling the
intermediate version instead of the scaled-down
version?
