1.

In each of the following instances, discuss whether horizontal or vertical

boundaries have been changed, and whether they were extended or shrunk.

(A) The acquisition of Motorola Mobility, a dedicated Android partner, will

enable Google to supercharge the Android ecosystem and will enhance
competition in mobile computing. Motorola Mobility will remain a
licensee of Android and Android will remain open. Google will run
Motorola Mobility as a separate business.

The vertical boundaries have been extended. Google merged with Motorola Mobility
in order to become a provider that will be closer to the end users. The products are
related.

(B) Hewlett-Packard said it is exploring a spinoff of its PC business and has

bid $10.25 billion to acquire software maker Autonomy.

In this case, the horizontal boundaries have been extended because the company will
have more types of products to sell to its customers. The scope of the operation is
broader.

2. Describe both horizontal and vertical boundaries of National Chengchi

University. In what ways could the horizontal boundary be expanded? In what
ways could the vertical boundary be extended?

Horizontal boundaries: Undergraduate programs, Master Programs, Ph.D. programs,

language programs, research programs, study exchange program, housing to students,
gym services, exercising services, cafeteria services, libraries, grocery store, clubs and
recreational activities, healthcare programs such as psychology department.

Vertical boundaries: services are offered mostly for students, the community also
receives services, and further up in the vertical boundary would be the government
and the country through research studies and useful thesis. Additionally training to
faculty staff and organizational activities are on top of the vertical boundary. Also,
NCCU has programs that locate the students who want to do internships or a full job
in some of the companies that work with the university.

The horizontal boundaries of NCCU can be expanded by opening new careers and

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majors, for example medicine, art, weekend executive courses.

The vertical boundaries can be extended by having high school, for example because
in this way the chain of services provided by the university will increase vertically.

3. The price of mobile telephone calls is 2 dollar a minute. Antonella buys 135
minutes a month. Identify her buyer surplus based on the following demand
curve. Explain how a mobile phone company can use a package deal to raise its
revenue. Moreover, explain how a mobile phone company can use a two-part
pricing to raise its revenue.

Solution:

Antonella is paying a total of 135 minutes X $2/per minute = $270. It was calculated
as the area of the rectangle .
She perceives a buyer surplus equal to area of the triangle above the rectangle

calculated previously. That area is equal to

This means the company is only receiving a total of $270 instead of $1,485 (18%) in
the case of a customer like Antonella. However, if an excessive change of price occurs
the customer may not buy and replace the service since there are other service
providers.

The following package deal is suggested to increase the revenue for the company:

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Offer of 200 minutes for $299, knowing that the customer will not use more than 150
minutes a month (because the marginal benefits are negative after this point). This
way the company gets additional $29 with this customer each month and doesn’t risk
a potential leaving customer for excessive price changes.
The company now receives $299 which is 20% of the potential buyer surplus of this
particular customer.
In order to capture the remaining surplus of $1,186 a month, it would be suggested to
offer a complement of the service. For example: insurance $50, subscription to a
cloud of digital services as Netflix, apple music, mobile streaming $50. Other
products may include residential cable and internet $350.
The company has revenue of $749 and the customer is now left with a surplus of only
$466. This means the company increased their profit by 277% by adding a bundle of
complementary services which the customer is willing to pay for.

Second option: Two-part Pricing

Offering a digital services bundle for $480 and then charging $2 per minute will
ensure the customer consumes the required amount of minutes with a limit of 150
minutes a month. This way the customer will feel that she is in control of spending
but in reality the company has captured the surplus and profited at least 270% more
than with the original plan.With this plan, the company receives a total of $780 in the
scenario where the customer consumes all available minutes. Now the company
profits 52% of the maximum profit scenario.

In both cases it is advisable to find additional complimentary services to acquire the

remaining 48% of the surplus ($705)

4. In 1998, the value of worldwide sales of recorded music in the form of singles,
music cassettes, and CDs was $38.7 billion. Americans bought 3.1 CDs and 0.6
music cassette per capita, while Mexicans bought 0.5 CD and 0.3 music cassette
per capita.

(A)Explain why per capita CD sales were relatively higher while per capita sales
of music cassettes were relatively lower in the United States than in Mexico.
(B)On a suitable diagram, draw the U.S. demand for music CDs. Explain how
the following changes would affect the demand curve: (i) increase in the price of
CDs; (ii) rise in the ownership of CD players; and (iii) fall in the price of music
cassettes.
(C)On another diagram, draw the demand for music CDs in Mexico. Explain
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how the following changes would affect the demand curve: (i) fall in advertising
by music publishers such as Sony and Time Warner; (ii) reduction in the penalty
for copyright infringement; and (iii) increase in the price of hamburgers.

4a. Per capita CD sales were relatively higher while per capita sales of music cassettes
were relatively lower in the United States than in Mexico because American has
more income than Mexican.
4b. Demand of CD in the US

i.

Demand will decrease due to the increase in price of CDs.

ii.

Demand will increase due to there are more people that hold the CDs player.

iii.

Demand will increase because of the increase in cassette price.

4c. Demand of CDs in Mexico

i.

Demand will decrease due to the fall in advertising.

ii.

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Demand will decrease due to the reduction in penalty of infrindgement will increase
the number of underground products.

iii.

Price of hamburger is not related. So, the graph remained the stable.

5. The price of Chanel perfume is around $150 per fluid ounce, while the price of
bottled water is $1 per gallon. Tiffany buys 2 fluid ounces of Chanel and 10
gallons of bottled water a month.
(A).Using relevant demand curves, illustrate Tiffany's choices. Illustrate how the
following changes will affect Tiffany's demand for Chanel perfume: (i) price
decreases to $140 per fluid ounce, and (ii) increase in price of another of
Tiffany's favorite perfumes.
(B).Tiffany spends more money each month on perfume than bottled water.
Does this necessarily mean that water gives her less total benefit than perfume?
Use appropriate demand curves to address this question.
A. (I) and (II)

I) When the price decreases to $140 per fluid ounce, Tifanny will be most
likely to buy more therefore the demand will increase.
II) Increase in price of another of Tiffany's favorite perfumes then the demand
for Chanel will shift to the right.
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 B.

Chanel perfumes buyer’s surplus is smaller compared to the water buyer’s surplus.
This means that even if the price of water is high Tiffany will still buy it because is a
necessary good. It does not matter the price of water, people will still pay for it.

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6.True or false. Explain why.
(i) The demand for business travel is less elastic than that for leisure travel.

It is true because business travelers generally have to buy flight tickets in a specific
time and also the adjustment time is short run because they cannot adjust their
schedules easily, because they do not have so much time to plan it.

(ii) The price elasticity of demand for beer is smaller than the price elasticity of
demand for Taiwan beer.

It is true because the beer is substituted product that can be replaced by another kind
of drink. On the contrary, The Taiwan beer is a complemented product.

(iii) The long-run demand for a durable item is more income elastic than the
short-run demand, while the long-run demand for a non-durable item is less
income elastic than the short-run demand.

It is true because for durable items the long run demand is higher, which means that is
more income elastic. The buyers have more time to buy non durable items because it
is more expensive than a non durable item. Generally the durable items are not
necessary products.

7.A study of the demand for gasoline at Boston-area service stations reported
that the elasticity with respect to price (combining the pure price effect with the
effect on waiting times) was -3.3, the elasticity with respect to station fueling
capacity was 0.7, and the elasticity with respect to the average price at nearby
stations was 1.2 (Png & Reitman, 1984).

(A).Explain why the elasticity with respect to the average price at nearby stations
is a positive number.

The elasticity with respect to the average price at nearby stations was 1.2. That means
that demand for gasoline at Boston-area is elastic. In other words, they are a
substitute, which means that an increase in the price at a nearby station will increase
in the demand of gasoline at Boston-area.

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(B).Amy’s station is the only competitor to Al’s. Al's station has 2% more fueling
capacity. Originally, both stations charged the same price. Then Amy reduced
her price by 1%. What will be the difference in quantity demanded between the
two stations?

Alan

Change Elasticity Effect

Price 1% 1.2 0.012
Fueling capacity 2% 0.7 0.014
Net 0.002

Alan: Q= (0.02*0.7)-(0.01*1.2) = 0.014 – 0.012 = 0.002 equivalent to 0.2%

Amy

Change Elasticity Effect

Price -1% -3.3 0.033

Amy: Q= (-0.01)*(-3.3) = 0.033 equivalent to 3.3%

Difference: 3.1%

(C).If Amy raises capacity from 5 to 6 fueling places, by how much could she
increase price without affecting sales?

Amy: Q=0.20*0.7+P*(-3-3) = 0, P = 4.2