Problem set 1

 1. Suppose the number of firms you compete with has recently increased. You estimated that as a result of the increased competition, the demand elasticity has increased from –2 to –3, i.e., you face more elastic demand. You are currently charging $10 for your product. If demand elasticity is -3, you should charge [x]. 

2.  Explain the difference in the profit realized under the two situations (the price in each market or in the two markets combined.)

Make sure you include the profit with and without price discrimination in your answer.

3.  Time Warner could offer the History Channel (H) and Showtime (S) individually or as a bundle of both. Suppose the reservation prices of customers 1 and 2 (the highest prices they are willing to pay) are presented in the boxes below.

The cost to Time Warner is $1 per customer for licensing fees.

Preferences

                                Showtime        History Chanel                    

Customer 1                 9                                   2                           

Customer 2                 3                                   8

3.1 Should Time Warner bundle or sell separately?  Your answer needs to include the unbundled and bundled profits

3.2 Suppose Time Warner could sell Showtime for $9, and History channel for $8, while making Showtime-History bundle available for $13. Should it use mixed bundling. i.e., sells products both separately and as a bundle? 

Your answer must include the profit with mixed bundling.