Homework 1
Managerial Economics
IMBA, NCCU
Answer Key
1.In each of the following instances, discuss whether horizontal or vertical boundaries
have been changed, and whether they were extended or shrunk.
(A)The acquisition of Motorola Mobility, a dedicated Android partner, will enable
Google to supercharge the Android ecosystem and will enhance competition in
mobile computing. Motorola Mobility will remain a licensee of Android and Android
will remain open. Google will run Motorola Mobility as a separate business.
(B)Taiwanese hardware maker Acer, the world's second largest PC manufacturer, has
just joined the ranks of the sky-high elite, purchasing Silicon Valley-based iGware for
$320 million. Acer's acquisition of the little-known cloud computing firm will
reportedly allow it to launch a cloud product next year, and is seen as a long-term
strategic move for the tech giant.
(C)Hewlett-Packard said it is exploring a spinoff of its PC business and has bid
$10.25 billion to acquire software maker Autonomy.
(D)HTC Corporation, a global designer of mobile phones and devices, announced the
acquisition of all outstanding shares of S3 Graphics Co., Ltd. (“S3 Graphics”) for an
aggregate consideration of US$300 million, payable in cash. The acquisition
strengthens HTC’s technology leadership and extends its IP portfolio with the addition
of 235 patents and the pending applications, including those related to graphics
visualization technologies.
Answer:
(A)Vertical boundary is extended. Horizontal boundary may be extended (G2
+Motorola)
(B)Horizontal boundary is extended
(C)Horizontal boundary is shrunk. Vertical boundary is extended.
(D)Vertical boundary is extended.
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2.Between 2001 and 2003, China Mobile’s number of subscribers grew from 90.6 to
141.6 million as the company added subscribers and acquired service providers in the
poorer inland regions of China. However, over the same period, its average revenue
per user (APRU) fell from 141 to 102 yuan per month and its proportion of
subscribers using pre-paid service rose from 48% to 64%.
(A)How would the entry of China Unicom affect the demand for China Mobile
service?
(B)How would China Mobile’s provision of pre-paid service affect the demand for its
post-paid (contract) service?
(C)Compare the demand for pre-paid service in the inland regions with that in the
wealthier coastal regions.
(D)Relate your discussion in (b) and (c) to China Mobile’s decline in ARPU.
Answer:
(A) would lower the demand.
(B) Would lower the demand as some subscribers switch from post-paid to pre-paid
service.
(C) If pre-paid service is an inferior product, the demand in the inland regions would
be higher.
(D)ARPU is lower for pre-paid than contract service. ARPU is lower in poorer areas
than richer areas. Both of these factors explain China's Mobile's decline in ARPU.
3.In 1998, the value of worldwide sales of recorded music in the form of singles,
music cassettes, and CDs was $38.7 billion. Americans bought 3.1 CDs and 0.6
music cassette per capita, while Mexicans bought 0.5 CD and 0.3 music cassette per
capita.
(A)Explain why per capita CD sales were relatively higher while per capita sales of
music cassettes were relatively lower in the United States than in Mexico.
(B)On a suitable diagram, draw the U.S. demand for music CDs. Explain how the
following changes would affect the demand curve: (i) increase in the price of CDs; (ii)
rise in the ownership of CD players; and (iii) fall in the price of music cassettes.
(C)On another diagram, draw the demand for music CDs in Mexico.
Explain how
the following changes would affect the demand curve: (i) fall in advertising by music
publishers such as Sony and Time Warner; (ii) reduction in the penalty for copyright
infringement; and (iii) increase in the price of hamburgers.
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Answer:
(A) Music CDs are a normal product, while music cassettes are an inferior product.
(B) (i) Increase in the price of music CDs: movement along the demand curve; (ii)
rise in CD player ownership: shift demand for CDs to the right; (iii) fall in the price of
music cassettes: shift demand for CDs the the left.
(C) (i) Fall in advertising: shift demand for CDs to the left; (ii) reduction in penalty:
shift demand for CDs to the left because they are substitutes; (iii) increase in
hamburger price: no effect.
4.The price of Chanel perfume is around $150 per fluid ounce, while the price of
bottled water is $1 per gallon. Tiffany buys 2 fluid ounces of Chanel and 10 gallons of
bottled water a month.
(A).Using relevant demand curves, illustrate Tiffany's choices. Illustrate how the
following changes will affect Tiffany's demand for Chanel perfume: (i) price
decreases to $140 per fluid ounce, and (ii) increase in price of another of Tiffany's
favorite perfumes.
(B).Tiffany spends more money each month on perfume than bottled water. Does
this necessarily mean that water gives her less total benefit than perfume? Use
appropriate demand curves to address this question.
Answer:
(A) (i) This will increase the quantity demanded of Chanel perfume -- movement
down along the demand curve; (ii) This will increase the demand for Chanel
perfume -- the demand curve shifts to the right.
(B) No. Total benefit is the area under the demand curve (which is not the same
as expenditure). The area under the demand curve for perfume could be
much smaller than that for water. Implication: Nancy is getting much more
buyer surplus from her purchases of water than from her purchases of
perfume.
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5.PCCW provides broadband Internet access in Hong Kong under the brand name,
Netvigator. Table 1 lists several of the plans offered in April 2004.
Table 1: Netvigator Broadband Internet Access Plans
Plan
Monthly
Subscription
Included
Hours
Charge per
additional hour
Bandwidth
Basic
HK$198
20
HK$2
Up to 1.5 Mbps
3M Single
User Plan
HK$298
100
HK$2
Up to 3.0 Mbps
6M Single
User Plan
HK$398
200
HK$2
Up to 6.0 Mbps
(A). Ms. Wong subscribes to the 6M plan and uses 150 hours a month. Suppose that
Wong's demand curve is a straight line such that if the price of access were HK$10
per hour or higher, she would buy nothing. Draw her demand curve, and calculate
her buyer surplus.
(B).Suppose that Wong switches to the 3M plan. Referring to her demand curve, how
many hours would she use each month? Calculate her buyer surplus.
(C). Suppose that Wong switches to the basic plan. Referring to her demand curve,
how many hours would she use each month? Calculate her buyer surplus.
Answer:
(A) The demand curve is a straight line with the vertical intercept (10) and horizontal
intercept (150). Using 150 hours, her total benefits are $750 (=1/2*10*150). Her
actual amount paid is equal to $398. Therefore, her buyer surplus is $352 (=750-398).
(B)Based on the demand curve, she would use 120 hours each month if the price is $2
per hour. For using 120 hours, her total benefits are equal to $720 (=1/2*[10+2]*120).
Her actual amounts paid are equal to $338 (=298+20*2). Therefore, her buyer surplus
is $382 (=$720-$338).
(C)Based on the demand curve, she would also use 120 hours each month if the price
is $2 per hour. For using 120 hours, her total benefits are equal to $720
(=1/2*[10+2]*120). Her actual amounts paid are equal to $398 (=198+100*2).
Therefore, her buyer surplus is $322(=$720-$398).
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6.Suppose that a typical household's demand for long-distance call is represented by
the equation
D = 200 − 4 p + 0.4Y ,
where D is the quantity demanded in minutes a month, p is the price of calls in cents
per minute, and Y is the household's income in thousands of dollars a year. Assume
that Y=200.
(A)Draw the household's demand curve.
(B)How many minutes will the household buy at the price of 25 cents a minute?
(C)What is the maximum lump sum that a long-distance carrier can charge the
household for a package of 140 minutes of calls?
(D)How can the long-distance carrier charge the household when it uses the two-part
pricing method instead of package deal?
Answer:
(A) The demand curve will be downward sloping.
(B) 140 minutes.
(C) 1/2[0.60+0.25]*140=59.5
(D)Fee=1/2*0.35*140=24.50; $0.25 per minute.
7.A study of the demand for gasoline at Boston-area service stations reported that the
elasticity with respect to price (combining the pure price effect with the effect on
waiting times) was -3.3, the elasticity with respect to station fueling capacity was 0.7,
and the elasticity with respect to the average price at nearby stations was 1.2 (Png &
Reitman, 1984).
(A).Explain why the elasticity with respect to the average price at nearby stations is a
positive number.
(B).Amy’s station is the only competitor to Al’s. Al's station has 2% more fueling
capacity. Originally, both stations charged the same price. Then Amy reduced her
price by 1%.
What will be the difference in quantity demanded between the two
stations?
(C).If Amy raises capacity from 5 to 6 fueling places, by how much could she
increase price without affecting sales?
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Answer:
(A)Because they are substitutes---an increase in the price at nearby stations (e.g.
by 1%) will raise the quantity demanded at the service station under consideration
(e.g. by 1.2 %).
(B)Al's Q%=2%*0.7-1%*1.2=0.2%, Amy's Q%=(-1%)*(-3.3)=3.3%, the
difference in Q%=3.1%.
(C) Amy's Q%=20%*0.7+P%*(-3.3)=0, P%=4.2%
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