Question

Assume Netflix operates as a monopoly in the movie streaming market. Each month Netflix has fixed costs of $10,000 and the marginal cost of each additional subscription is $0. Suppose the market demand for Netflix subscriptions is:

Q_D = 1000 – 5P

Q denotes the quantity of subscriptions, and P denotes the monthly subscription price

e. Calculate the deadweight loss associated with Netflix's monopoly power. DWL =

f. Suppose the entry of Disney+ and other streaming services causes the demand for Netflix to decrease. Netflix still operates as a monopoly, but the market demand curve they face is now Q_D = 800 - 10P. Solve for Netflix's new profit-maximizing quantity and price:

Q_max =   , P_max =  

g. After the change in demand, what is the maximum monthly profit Netflix can make now?

Profit =  

Answer 1

e. Firstly, we have to find monopoly output and competitive output.

Q = 1000 - 5P
So, 5P = 1000 - Q
So, P = (1000/5) - (Q/5)
So, P = 200 - 0.2Q
Total Revenue, TR = P*Q = (200 - 0.2Q)*Q = 200Q - 0.2Q2
MR = d(TR)/dQ = 200 - 2(0.2Q) = 200 - 0.4Q
Monopoly maxizes profit where MR = MC.
So, 200 - 0.4Q = 0
So, 0.4Q = 200
So, QM = 200/0.4 = 500
PM = 200 - 0.2Q = 200 - 0.2*(500) = 200 - 100 = 100

Competitive output is that where P = MC
So, 200 - 0.2Q = 0
So, 0.2Q = 200
So, QC = 200/0.2 = 1000
Pc = MC = 0

DWL = area of triangle = (1/2)*base*height = (1/2)*(QC - QM)*(PM-Pc) = (1/2)*(1000-500)*(100-0) = (1/2)*500*100 = $25,000

DWL = 25,000

f. QD = 800 - 10P
So, 10P = 800 - Q
So, P = (800/10) - (Q/10)
So, P = 80 - 0.1Q
TR = P*Q = (80 - 0.1Q)*Q = 80Q - 0.1Q2
MR = d(TR)/dQ = 80 - 2(0.1Q) = 80 - 0.2Q
Now, MR = MC gives,
80 - 0.2Q = 0
So, 0.2Q = 80
So, Q = 80/0.2 = 400
P = 80 - 0.1Q = 80 - 0.1*(400) = 80 - 40 = 40

Qmax = 400 , Pmax = 40

g. Profit = TR - Total cost = (P*Q) - 10,000 = (400*40) - 10,000 = 16,000 - 10,000 = 6,000

Profit = $6,000