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Math Help - Economics

  1. #1
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    Economics

    Hi Everyone,

    I'm new here but im trying to help where I can. Unfortunately got question that I'm finding very hard and dont know where to get help. This question has two parts to it. Very grateful for your help.

    Thanks,

    James


    A monopoly firm sells romantic-comedy movies over the internet. After operating for a number of mont hs, the CEO of the firm realises that the firm faces two groups of potential customers for its movies: honest and dishonest people. The CEO is confused about how to deal with this and undertakes an analysis of the situation. The demand function for both groups of consumerís is the same: p = 120 Ė Q. The firm has a constant marginal and average cost of 20.
    a. What will be the firmís profit maximising price, quantity and profit if it is not possible for dishonest customers to steal movies? What are the welfare consequences of this situation?
    b. Next, assume that dishonest customers can pirate movies. What will be the firmís profit maximising price, quantity and profit if it is possible for dishonest customers to steal movies?



    Thanks again,

    James
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  2. #2
    Grand Panjandrum
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    Quote Originally Posted by jameslee View Post
    Hi Everyone,

    I'm new here but im trying to help where I can. Unfortunately got question that I'm finding very hard and dont know where to get help. This question has two parts to it. Very grateful for your help.

    Thanks,

    James


    A monopoly firm sells romantic-comedy movies over the internet. After operating for a number of mont hs, the CEO of the firm realises that the firm faces two groups of potential customers for its movies: honest and dishonest people. The CEO is confused about how to deal with this and undertakes an analysis of the situation. The demand function for both groups of consumer’s is the same: p = 120 – Q. The firm has a constant marginal and average cost of 20.
    a. What will be the firm’s profit maximising price, quantity and profit if it is not possible for dishonest customers to steal movies? What are the welfare consequences of this situation?
    b. Next, assume that dishonest customers can pirate movies. What will be the firm’s profit maximising price, quantity and profit if it is possible for dishonest customers to steal movies?



    Thanks again,

    James
    a). If there are no dishonest customers:

    Revenue=pQ=p(120-p)

    So:

    Profit=Revenue-(maginal costs)Q=p(120-p)-20(120-p)

    Now find p that maximises Profit.

    b) If the price p the demand for pirated copies is 120 (as pirates see a price of 0) and that for legit copies is Q=120-p

    So:

    Revenue=pQ=p(120-p)

    and:

    Profit=Revenue-(marginal cost)(Q+120)=p(120-p)-20(120-p+120)=p(120-p)-20(240-p)

    This is what I assume is the expected approach but I consider it invalid and that there would be reduced legit sales - this is the film and music industries thesis on piracy.

    CB
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  3. #3
    Grand Panjandrum
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    Quote Originally Posted by CaptainBlack View Post

    b) If the price p the demand for pirated copies is 120 (as pirates see a price of 0) and that for legit copies is Q=120-p

    So:

    Revenue=pQ=p(120-p)

    and:

    Profit=Revenue-(marginal cost)(Q+120)=p(120-p)-20(120-p+120)=p(120-p)-20(240-p)

    This is what I assume is the expected approach but I consider it invalid and that there would be reduced legit sales - this is the film and music industries thesis on piracy.

    CB
    Having thought about this some more I don't like the above model of the effect of piracy and return to my initial thought that in this case the problem is ill posed.

    CB
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  4. #4
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    The third part of the question says:

    explain. The welfare changes if piracy of the firms movies occurs.

    Do you know what this is asking me to do?

    Thanks again
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  5. #5
    Grand Panjandrum
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    Quote Originally Posted by jameslee View Post
    The third part of the question says:

    explain. The welfare changes if piracy of the firms movies occurs.

    Do you know what this is asking me to do?

    Thanks again
    No.

    CB
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