Question

 

After The Cable Guys, a local TV cable company in Backwater, KS increased the monthly subscription price for its services from $20 to $30, the number of subscribers dropped from 2200 to 1800.

 

a. Is demand for cable TV in Backwater elastic or inelastic in the specified price range? Explain how you arrived at this answer.

 

b. Based on the information provided above, which of the following equations provides the best linear approximation for demand for cable TV in Backwater?

a) Qd = 2,200 – 20 P

b) Qd = 2,800 – 20 P

c) Qd = 2,800 – 40 P

d) Qd = 3,000 – 40 P

 

c. True or False? State whether each of the following four statements is true or false. No explanation is required. Each statement is worth 1.5 points. The Cable Guys took advantage of the low interest rates and refinanced their debt making their monthly payments on that debt decrease by 20 percent.

T F – It is optimal for the company to pass part of their savings from refinancing on to the customers by lowering the price they charge for their services.

Next, DirecTV (a satellite TV company) trucks appear in the area offering the residents to switch from cable to satellite TV.

T F – The cross-price elasticity of demand between the services of The Cable Guys and DirecTV is positive.

T F – As a result of DirecTV entry, the demand curve for The Cable Guys’ services will shift to the right.

T F – As a result of DirecTV entry, the demand for The Cable Guys’ services will become less elastic.

Answer 1

a).

Here the price of its services increases from $20 to $30, => the percentage change in price is “(30-20)*100/20 = 50%”, the number of subscribers dropped from 2200 to 1800, => the percentage change in number of subscribers is “(1800-2200)*100/2200 = (-18.18)”. So, the price elasticity of demand is the ratio of “percentage change in the number of subscribers” to “percentage change in price”.

=> e = (-18.18)/50 = (-0.36), here the absolute value is less than 1 implied the elasticity is inelastic in nature.

b).

Here the initial price and quantity are “Q1=2200” and “P1=20”. The final price and quantity are “Q2=1800” and “P2=30”.

=> dQ/dP = (Q2-Q1)/(P2-P1) = (1800-2200)/(30-20) = (-400)/10 = (-40).

So, the equation of the linear demand function is given below.

=> Q = (-40)*P + C, where it must pass through “Q1=2200” and “P1=20”.

=> 2200 = (-40)*20 + C, => C = 2200 + 800 = 3000.

=> Q = (-40)*P + 3000, => Q = 3000 – 40*P, be the linear demand function for the cable TV.

So, the correct answer is “D”.

c).

i). Here the demand function is inelastic in nature implied decrease in price also decrease the revenue. So, the statement is FALSE.

ii). DirecTV is also offering the same services implied the as the price of one increases the demand for other also increases, => the cross price elasticity is positive, the correct answer is TRUE.

iii). Here after the entry of DirecTV the market share of cable guy’s decreases implied the demand decreases to left side, the stamen is FALSE.

iv). As the number of service provider increases the demand become more elastic the given statement is FALSE.