The Mall Street Journal is considering offering a new service which will send news articles to readers by email. Their market research indicates that there are two types of potential users, impecunious students and high-level executives. Let x be the number of articles that a user requests per year. The executives have an inverse demand function PE(x) = 100 − x and the students have an inverse demand function PU(x) = 80 − x. (Prices are measured in cents.) The Journal has a zero marginal cost of sending articles via email. Draw these demand functions in the graph below and label them.
(a) Suppose that the Journal can identify which users are students and which are executives. It offers each type of user a different all or nothing deal. A student can either buy access to 80 articles per year or to none at all. What is the maximum price a student will be willing to pay for access to 80 articles? __________. An executive can either buy access to 100 articles per year or to none at all. What is the maximum price an executive would be willing to pay for access to 100 articles? __________.
(b) Suppose that the Journal can’t tell which users are executives and which are undergraduates. Thus it can’t be sure that executives wouldn’t buy the student package if they found it to be a better deal for them. In this case, the Journal can still offer two packages, but it will have to let the users self-select the one that is optimal for them. Suppose that it offers two packages: one that allows up to 80 articles per year the other that allows up to 100 articles per year. What’s the highest price that the undergraduates will pay for the 80-article subscription? __________.
(c) What is the total value to the executives of reading 80 articles per year? __________.
(d) What is the the maximum price that the Journal can charge for 100 articles per year if it wants executives to prefer this deal to buying 80 articles a year at the highest price the undergraduates are willing to pay for 80 articles? __________.
(e) Suppose that the Mall Street Journal decides to include only 60 articles in the student package. What is the most it could charge and still get student to buy this package? __________.
(f) If the Mall Street Journal offers a “student package” of 60 articles at this price, how much net consumer surplus would executives get from buying the student package? __________.
(g) What is the most that the Mall Street Journal could charge for a 100- article package and expect executives to buy this package rather than the student package? __________.
(h) If the number of executives in the population equals the number of students, would the Mall Street Journal make higher profits by offering a student package of 80 articles or a student package of 60 articles? __________.