# homework of economic 374

Industrial Organizationâ€“Homework 1 Due date: Feb. 20, Friday (class time)

1. Suppose the demand for Netflix is given by
qN =aâˆ’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 Netflixâ€™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 = Î²0 + Î²1p + Î²2p Ìƒ,
where Î²0, Î²1, Î²2 are constant numbers, Q is the quantity demanded, p is its price, and p Ìƒ is the

price of another good. Then the own-price elasticity is

Îµ = Î²1p/q, 1

and the cross-price elasticity is

Îµ Ìƒ = Î²2p Ìƒ/q

3. Las-O-Vision is the sole producer of holographic TVs, 3DTVs. The weekly demand for 3DTVs is

q = D(p) = 10200 âˆ’ 100p (2)

The cost of producing q 3DTVs per week is q2/2 (note this implies that MC = q).
(a) What is Las-O-Visionâ€™s total revenue schedule?
(b) What is Las-O-Visionâ€™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.