Managerial Economy Essay Answers

Topics: Supply and demand, Economics, Long-run Pages: 7 (1788 words) Published: October 10, 2013
 Managerial Economics
Homework #1
Answer
Demand

1. 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 Mobile’s decline in ARPU.

2. The price of Chanel perfume is around $200 per fluid ounce, while the price of Arrowhead bottled water is $1 per gallon. Nancy buys 2 fluid ounces of Chanel and 10 gallons of bottled water a month.

a. Using relevant demand curves, illustrate Nancy's choices. Illustrate how the following changes will affect Nancy's demand for Chanel perfume: (i) price increase to $220 per fluid ounce, and (ii) cut in price of another of Nancy's favorite perfumes. b. Nancy spends more money each month on perfume than bottled water. Does this necessarily mean that perfume gives her more total benefit than water? Use appropriate demand curves to address this question.

Answer:

(a)This will decrease the quantity demanded of Chanel perfume -- movement down along the demand curve; (ii) This will decrease the demand for Chanel perfume -- the demand curve shifts to the left. (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.

3. PCCW provides broadband Internet access in Hong Kong under the brand name, Netvigator. The following table lists several of the plans offered in April 2004.

Table: 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.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$20 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.

Answer:

(a) Her buyer surplus with the 6M plan is 1/2*20*150-398=$1,102

(b) With the 3M plan, she would use 135 hours a month (35 hours in excess of the included time. Her buyer surplus would be 1/2*[20+2]*135-298-70=$1,117

Elasticity

4. Among commercial users such as apartment buildings, hotels, and offices, the demand for water is estimated to have an own-price elasticity was -0.36, the elasticity with respect to the number of commercial establishments was 0.99, and the elasticity with respect to the average summer temperature was 0.02 (Williams and Suh, 1986).

a. Intuitively, would an increase in the number of commercial establishments...
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