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Firm Z gives Internet access and a bundle of related information services to subscribers. Best estimate of subscriber demand is given by P = 20 - 5Q where Q is number of subscribers per month in millions and P is the monthly subscription price. In turn, firm Z purchases server capacity from firm N, paying charge of 2 million per month plus $10 per month for each subscriber. All other operating expenses for firm Z (for employees, office, equipment, and so on) come to a total of 2 million per month.

a)(i) To maximize its profit, how many subscribers must firm Z serve and at what monthly subscription price?

(ii) Firm Z has contracted with firm N for next six months. Unfortunately, Z discovers that its operating expenses are closer to 4 million (rather than 2 million). Should firm Z continue to operate over next six months? Beyond six months.

b) Firm Z has identified segment of "hardcore, sophisticated users" provider who tends to "shop around" in choosing their preferred internet provider. These users also spend more time online, about 25% more time than average regular subscriber. (in terms of capacity used, each hardcore user counts as 1.25 regular subscribers). Should the firm offer a different subscription price to these users?Provide a brief qualitative explanation.

c) Firm N offers to give firm Z monthly server capacity for up to 4 million subscribers at flat rate of 15 million. Under this option, answer problems in Part A, section i.(suppose the firms other operating expenses come to 2 million). From firm Z's perspective, are these new contract terms more or less attractive than original terms in part A.

d) Assume that firm Z elects new contract offered in part c. Now firm recognizes that it can gain the additional source of revenue by allowing banner advertising on it site. It has recently signed advertising agreements with various internet vendors. Effect of these agreements is to bring firm $10 of advertising revenue for each subscriber to the site. What affect (if any) would this have on firm Z's profit maximizing subscription price and number of subscribers?

Microeconomics, Economics

  • Category:- Microeconomics
  • Reference No.:- M922702

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