Name

Two consumers are resident in Smallville.  The two consumers, Smith and Jones, have the following demand curves for hours of movie watching on Sundays:

P_s = 12 - Q

P_j = 12 - 2 Q

Where P_s and P_j represent marginal willingness to pay values (reservation prices) for Smith and Jones, respectively, and Q represents the number of hours of movies they watch.  Smith and Jones are the only two consumers in the market.  Movies are made available each Sunday by Smallville Broadcasting Company (SBC).

There are three diagrams at the bottom that may help you with this exercise.  Feel free to draw on them and be sure to label them carefully.

1. When movies are made available only in broadcast format are they a private good, a  public good, a  collective good, or a commons good?

2. When movies are made available only in cable format, like Comcast, are they a private good, a public good, a collective good, or a commons good?

3. At present movies are available in Smallville only in broadcast format, like the network TV broadcasts of ABC, CBS and NBC that you are familiar with.  If SBC, the broadcasting company in Smallville, broadcasts 1 hour of movies how much would Smith be willing to pay?

4. When movies are available in broadcast format how much would Jones be willing to pay for one hour of viewing?

5. When movies are available in broadcast format what is Smith’s and Jones’ combined willingness to pay for one hour of viewing? For two hours of viewing?

6. Given your earlier answers, what is the market demand curve for broadcast movies?  Be careful, Jones would not pay anything to watch more than six hours.
 

For up to six hours of viewing time the market demand curve is:

For six to twelve hours of viewing time the market demand curve is:

7. If marginal cost of an hour of broadcast is $6 per hour what is the socially optimal number of hours of broadcast movies?

8. What is consumer surplus, given your previous answers? There is a presumption in your calculation that if an hour of broadcast movies is available for no fee then both Smith and Jones will watch it.

9. How much must SBC collect in advertising revenue in order to be willing to provide the socially optimal number of hours of broadcast?   SBC is able to collect advertising revenue in the amount you just determined.  What is the amount of producer surplus?

10. As a function of her reservation price, what is the quantity of movies demanded by Smith?
 

11.  As a function of his reservation price, what is the quantity of movies demanded by Jones?

12.  Suppose that SBC lays fiber optic cable in Smallville and ceases broadcast operations. Now movies are only available via cable.  If one does not pay the cable fee then one cannot view the movie.  If Smith pays to view the movie it is still possible for Jones to view the same movie, and vice versa. The marginal cost of providing an hour of movies is still $6, and for the time being we'll suppose that there are no fixed costs. At a price of $6 per hour how many hours of movies will Smith purchase?  At a price of $6 how many hours of movies will Jones purchase?

Smith hours,    Jones   hours

13. At a price of $6 per hour how many hours of movies are made available by SBC to its subscribers?

14. At a price of $6 per hour how much consumer surplus accrues to Smith when movies are supplied via cable?

15. At a price of $6 per hour how much consumer surplus accrues to Jones when movies are supplied via cable?

16. What is the amount of total consumer surplus?

17. Using your answers to questions 12 and 13, how much producer surplus accrues to SBC?

18.  Is consumer surplus greater when movies are provided in broadcast format or in cable format? Greater in broadcast format, the same for both formats, less in broadcast format.

19. Your answer to question 16 differs from your answer to question 8 because the total amount paid by Smith or Jones to the cable company depends on the number of hours they watch TV not on the total number of hours that are made available on the network. True False

20. Smith and Jones both live in the same apartment building in Smallville that already has been wired for cable service.  A third tenant, Doe, moves into the building. Doe's preferences are such that at any given price he does not want to watch more TV than either Smith or Jones. What is the marginal cost to SBC of providing one hour of movies to Doe? 

21. Suppose that as a result of Doe's viewing habits SBC must now offer more hours of movies than it did in any of the previous questions.  Now what is the marginal cost to SBC of adding Doe to their network? $ per hour

22. Earlier it was stated that the marginal cost of providing an hour of movies was $6 and that there were no fixed costs. The $6 is the fee per hour SBC must pay to content providers like Disney.  If SBC buys a one hour show then they pay $6, if they buy a two hour show they pay $12, and so on, regardless of the number of viewers that tune in to the show.  In the short run there are certainly fixed costs associated with creating and running a cable network.  In the long run all costs are, of course, variable.  The flat monthly fee charged to its customers by a cable company like Comcast reflects their marginal cost of providing a TV show,  their marginal cost of providing an additional hour of showtime,  their average fixed cost of running the network.

23.  The cable network technology exists for SBC to discriminate perfectly between Smith and Jones (Doe has moved out of town).  What price and quantity should SBC offer to Smith? Smith's Price = Smith's Quantity =   What price and quantity should SBC offer to Jones? Jones' Price =   Jones' Quantity =

24. Under the circumstances of question 23 (cable with discrimination), what is consumer surplus ?

25. Under the circumstances of question 23 (cable with discrimination), what is producer surplus?

26. Economic surplus (the sum of consumer and producer surplus) is greatest when hours of movies are provided in a broadcast format, a  cable format with no discrimination, a cable format with perfect discrimination