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Homework #1
Managerial Economics 2021
Due Date: Oct. 6th, 2021
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
(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.
2. 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 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.
3. 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.
4. Suppose that a typical household's demand for long-distance call is represented by
the equation
D  200  4 p  0.4Y ,
where D is the quantity demanded in minutes a month, p is the price of calls in cents
per minute, and Y is the household's income in thousands of dollars a year. Assume
that Y=100.
(A) Draw the household's demand curve.
(B) How many minutes will the household buy at the price of 25 cents a minute?
(C) What is the maximum lump sum that a long-distance carrier can charge the
household for a package of 140 minutes of calls?
(D) How can the long-distance carrier charge the household when it uses the two-part
pricing method instead of package deal?
5. True or false. Explain why.
(A) The demand for business travel is less elastic than that for leisure travel.
(B) The price elasticity of demand for beer is smaller than the price elasticity of
demand for Taiwan beer.
(C) 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.
5. 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.
(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
(C) If Amy raises capacity from 5 to 6 fueling places, by how much could she
increase price without affecting sales?