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Problem 10(ii)—Big Apple Music Inc
Big Apple Music Inc. enjoys an exclusive copyright on the music written and produced by the Fab Four, a legendary British Rock group. Recently, a demand function was estimated for the music of the Fab Four. The estimate is:
Q = 144P^(-2.0)
Media production costs have been estimated to be
C = 5 + Q^1.5
which includes shipping, packaging and other miscellaneous charges incurred in producing the music. Prices are in U.S $ and quantity is in millions of units.
i) Calculate Big Apple’s profit maximizing price, quantity and profits,
ii) What will happen in the long run when the exclusive copyright expires under the assumption that a very large number of small firm’s will flood the market with the FabFour’s music, i.e., the industry will become purely competitive. Big Apple has by then outsourced its manufacturing to a new firm called Digital Reproduction which chargesBig Apple $5 for each reproduction. This fee includes reproduction of the music,packaging, customer management, shipping and promotion costs. Big Apple has virtually no on-going fixed costs. Calculate the long run profit maximizing price and quantity sold.
iii) How much will price fall and quantity sold increase after the market becomes purely competitive. Calculate economic profits.
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