Question

Wendy and Charlotte both enjoy watching Manu’s Kitchen Rules (or MKR). Initially, assume that when broadcast on public television MKR is a public good that is both non-excludable and non-rivalrous. Wendy and Charlotte have demand for MKR given by the following:

Qw=122 − 2?

Qc= 40 − ?

Initially, the marginal cost of producing each episode of MKR is constant and equal to 50.

a) Find the market demand curve for MKR and show this in a well labelled diagram. How much will be purchased in a competitive market? What is the efficient level of production and consumption?

b) Assume that the producers of MKR team up with the makers of tablet devices and rather

than showing episodes on television, they now become available to stream online. The effect

of this is to turn MKR into a private good that is both excludable and rivalrous. Find the

market demand curve and show it in a well-labelled diagram. If with online streaming, the

marginal cost of producing MKR falls to 24, how many units are consumed in a competitive

equilibrium? [3 marks]

c) Assume now that the Manu, the genius behind MKR decides that by streaming to tablet

devices, he is able to charge different prices to different consumers. If Manu practices third

degree price discrimination, what price does he charge Wendy and Charlotte? How many

episodes of MKR to Wendy and Charlotte watch and what is the total profit for Manu, the

creator of MKR? Show your answer in a well labelled diagram. [3 marks]

d) If Manu must charge all buyers the same price, what price will he charge? What quantity

will it sell? What are the profits of in that case? Who benefits and who loses as a result of

the ban on price discrimination? Show your answer in a clear well-labelled diagram. [3

mark

Answer 1