Question

Sal's satellite company broadcasts TV to subscribers in Los Angeles and New York. The demand functions for each of these two groups are: QNY = 70 -0.25PNY QLA = 110-0.5PLA 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 C = 1000 + 40Q where Q = QNY +QLA a. What are the profit-maximizing prices and quantities for the New York and Los Angeles markets? (round all answers to two decimal places) In New York, the equilibrium quantity is subscribers at an equilibrium price of $ . While in Los Angeles, the equilibrium quantity is subscribers at an equilibrium price of $ b. As a consequence of a new satellite that the Pentagon recently deployed, people in Los Angeles receive Sal's New York broadcasts and people in New York receive Sal's Los Angeles broadcasts. As a result, anyone in New York or Los Angeles can receive Sal's broadcasts by subscribing in either city. Thus Sal can charge only a single price. What price should he charge, and what quantities will he sell in New York and Los Angeles? The equilibrium price would be $ and Sal would have subscribers in New York and subscribers in Los Angeles. c. In which of the above situations, (a) or (b), is Sal better off? In terms of consumer surplus, which situation do people in New York prefer and which do people in Los Angeles prefer? Why? O A. Sal prefers (a) because profit is higher with price discrimination. Since NY's demand is less elastic, it prefers (b) because its price is lower in (b) and consumer surplus is higher. And since LA's demand is more elastic, it prefers (a) because its price is lower in (a) and consumer surplus is higher. O B. Sal prefers (b) because profit is higher with a uniform price. Since NY's demand is less elastic, it prefers (b) because its price is lower in (b) and consumer surplus is higher. And since LA's demand is more elastic, it prefers (a) because its price is lower in (a) and consumer surplus is higher. O C. Sal prefers (a) because profit is higher with price discrimination. Since NY's demand is more elastic, it prefers (b) because its price is lower in (b) and consumer surplus is higher. And since LA's demand is less elastic, it prefers (a) because its price is lower in (a) and consumer surplus is higher. OD. Sal prefers (b) because profit is higher with a uniform price. Since NY's demand is more elastic, it prefers (b) because its price is lower in (b) and consumer surplus is higher. And since LA's demand is less elastic, it prefers (a) because its price is lower in (a) and consumer surplus is higher.

Answer 1

Ans Demanduuctions Rer2aen a thesa two groupc are ; INY 0-0.25 hay 110-0'5PA Cost providing guni ts o asrevica is given y ohere,NYQLA C1000 + 40 dc 40 ме в a.) Condi fion to get the pofit maximi si ng priee and pantities i markal i, both the for NY markat MRNY мс for LA markel MR LA MC Now NY=0-O 25 PY 2 -O'25 dPNY O 25 PNY=70- ONY elasticity sdewand 'n NY O'25 280-4 NY RNY PNY y (RC- 49) d&NY MRNY 280-8NY M C = 40 For NY maxkat, the profi maximising eondili on is MRNY MC 280-80NY = 40 8 NY- 24O - 30 280-4x 30 = 280-120= 160

Agai n &LA110- 0'5 PA O'5 .P O's PLA 10-LA alastiai ty o diwavd in LA On LA RR0-29LA R20-29LQLA RLA MRLA 2 20-49LA dl LA Me 40 For LA max ket the profit maxi misi ng comditon is MR LA MC 2 20-4LA = 40 4 QLA 180 LA 45 PLA 220-2X4S = 220-90 = 13O In New York. , 4Pe eaui liarů um apaultty 30uscri bers at an rapilibrium price op60 while in Los Angeles, the ap'iliboi um quautty is 45 subscri bers ab an Rauilibriun price o l30 Sal can charge only a Singe price the price be P and the quaulity = Qny +Q P 220 when 180-075P P220 when +0-026P P220 when 180-O' 75 P 180- o1, 0 75P=

&40- 240-) P.Q MR 840- For prof maximi satteru MR= Me R40- =40. ar P = x F5 = 240 - 100 = |40 40- Total Revenue = P =140x 45 = 105O0 Total cost 1000+ 40X75 = 1000 +3000 = 4000 Porshi 6500 0500- 4000 i P 220, then P =P = 160 & NY 30 4800 P.Q=160 x30 Revemue a2oo 1000 + 200 eost, c 1000 + 40X a o 8600 Poregit 4800-RROO Proit wiu be dess îf the irm eharge P ) 220. and & Ny + L 5 140 Hence the auilioråum P = - 70-0.2SXP Now 70 -0'25X 14 0 . NY ,NY F0-35 NY 35 we can find QLA by Puting Pe140 Ln aauati on QA = !10 -0'5P 110-0'S X140 LA ar-35= 40 10-F0 40

S0, the Laui librd um priee would be 140 and Sal wowd have 85 40 cubcoibos sn Los Sub cori bars in Nen VaaK and Angeles with uniforem Pice, P140, NY 35, QLA - 40 2450 .SNY (280- 140) 35 X 140 x35 0 x40 1600 C.SLA X(220-140) 40 = 6500 Pocafi (140x 75) 1000 4OX F5 www with priee dSis oimi nahi orv C. SNY X120 X30 = 1800 (280-160) x 30 90x 45 = 202S C SLA x C220-130) x 45 40x 75) PrcefitNY 80 X160)+ 5 1ad - 1000- 3000 A 800 S8 50- 100o 66 50 Sal prapirs (a) bacaue profit 2s higher wł sh pice diseriminatim Si nee, NY's demand is Jess elacfic, 2t prefers (b) bcause 2ts pice comaumer surpus s highur. And since more elastie, it pregens(a) becauc ils pri ees eomoumir sunplus is higher Jower ' (b) and LA'& demand Lower n(a) and oplim A is orrect Hence