Network Economics (January-May 2022)

Homework 1

Note: This homework contains topics covered till video lecture no 13.
1. Consider a cellular service provider who has the wireless spectrum of B Hz. The
operator sets a price of p per unit bandwidth to maximize its profit. Each user
demands how much bandwidth it requires based on the price p. Different users expe-
rience different channel (based on the noise, distance from the base station etc.) and
the spectrum efficiency of the user is θ = log2 (1 + SN R). Note that θ is a random
variable and we assume that θ is uniformly distributed in the range [0, 1]. If a user
gets a bandwidth of b Hz then it can achieve data rate of θb bits per second and he
gets the utility of
u(θ, b) = ln(1 + θb).
(a) Given the price p, find the bandwidth demanded by an user which maximizes
her surplus. Find the surplus of the user in terms of p, b, θ. Note that for a
particular user θ is just a number between 0 and 1.
(b) Based on the b obtained in previous part, what is the total demand of the
bandwidth in this system? Comment on the demand function.
(c) Find the price the operator will set to maximize its revenue. Note that the
operator has maximum bandwidth of B so its maximum revenue can be Bp.
2. Comment
√ on the kind of preference between x1 , x2 if the utility function is u(x1 , x2 ) =
x1 + x2 .
3. Demand function of a good is D(p) = a − bp where a, b > 0 are constants. What
is the elasticity of this demand? Draw the demand curve and label the portions of
elastic and inelastic demands.
4. Consider a network offering voice and video services. The cost of the basic infrastruc-
ture that is common to both services is 10 units. The incremental cost of supplying
100 units of video service is 2 units and the incremental cost of supplying 1000 units
of voice is 1 unit. If the network charges p1 , p2 per unit of voice and video service
respectively, then write the conditions for these prices to be subsidy-free. Find the
subsidy-free prices p1 , p2 set by the network. Are these prices unique?
5. A monopolist faces a demand curve given by D(p) = 100 − 2p. Its cost function
is c(y) = 2y. What is the optimal level of production and price set for this by the
monopolist? Find the profit made by the monopolist in this case. What is the
elasticity of the demand at this price point? Now consider a situation where the
firm can only set the price equal to its marginal cost. Find the profit of the firm and
2
elasticity of the demand in this case. If the utility of the demand is u(x) = 50x − x4
then find the user surplus in both the cases.
6. Consider an ISP providing two services whose demands are independent. Let the
√ √
cost function of the ISP be c(x1 , x2 ) = 25 x1 + 20 x2 + 10 and the demand function

1
 4
for the services is x1 (p) = x2 (p) = x210+x2 . If the ISP uses γ = 1/8 while deciding the
1 2
Ramsey prices then find the total revenue of the ISP.
7. Consider a startup company which decides to design a network to serve three major
institutes in Tirupati, namely SVU,IIT and IISER. The cost of serving all the three
institues is 500. The standalone cost of serving an institute is 100, 125 and 50 for
SVU, IIT and IISER respectively. Also the cost of serving a pair of institutes is:
c({SV U, IIT }) = 270, c({SV U, IISER}) = 375, c({IISER, IIT }) = 350. Find a
Pareto optimal charging scheme for this startup.
8. There is a cable TV and a device with Netflix account in your room. You and your
roommate are sharing these devices but only one person can use a device at a time.
You like to watch Netflix and do not care one way or the other about watching
TV. How does your indifference curve look like for these two devices? On the other
hand, your roommate likes to watch TV and do not care one way or other about
Netflix. Can you comment on the Pareto optimal time sharing scheme of these
devices between you and your roommate?
9. In the earlier scenario, if your happiness watching one hour of Netflix is same as
that of watching two hours of TV then how does your indifference curve look like?
If your roommate gets same happiness by watching either two hours of Netflix or
one hour of TV. Comment on the Pareto optimal time sharing scheme in this case.