The European Demand for Access to Satellite Transmissions Can Be

question 75

Essay

The European demand for access to satellite transmissions can be divided into three groups: A, B, and C. The demand curves for the three groups are:
P_A = 500 - 2Q_A (for Q < 250)
P_B = 300 - Q_B (for Q < 300)
P_C = 400 - 2Q_C (for Q < 200),
where Q = number of hours access per month, and P = price per hour. Satellite transmission is a pure public good with zero marginal cost.
a. Explain the difference between horizontal and vertical summation of demand curves. Derive the horizontally and vertically summed demand curves. Explain the circumstances under which vertical summation is appropriate. When is horizontal summation appropriate?
b. Determine the efficient quantity of satellite service. Explain the process of finding the efficient quantity including a justification for the demand curve. What price is optimal?

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