1. (20) A few years ago, Amazon had a very public dispute with the book publisher Hachette regarding its prices for e-books. Amazon was trying to convince Hachette to lower its price for e-books, arguing that doing so would benefit both consumers and the publisher, Hachette was refusing to cut their prices, countering that lower prices would hurt both the publisher and its authors. Amazon explained their objectives in terms of price elasticity on the following discussion board: http://goo.gl/91EcMW Read the full post then answer the following questions. a.) Amazon states that "For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99." Use this information to calculate the price elasticity of demand for e-books between these two prices (use the arc formula). Show your work. b.) Suppose Amazon was selling 1,000,000 Hachette e-books when the price was $14.99. If their above calculations are correct, how many would they sell after the price is cut to $9.99? What would the total revenue from Hachette e-books equal before and after the price cut? c.) Amazon claims that "e-books are highly price elastic." If this is the case, why wouldn't Amazon want to cut prices even further? For example, why not cut the price of e-books to $0.99 instead of $9.99? d.) Given that Amazon is arguing that cutting e-book prices to $9.99 would benefit both Amazon and Hachette, why do you think Hachette was against this price cut? It is obvious that Hachette did not agree that this move would have benefited them; otherwise they would have voluntarily cut prices. Briefly explain what might be wrong with Amazon's reasoning from Hachene's perspective. 2. (8) A study of 130 stock purchase plans found that on average, these plans offered about 8 percent of the corporation's stock to its managers at a discount of 12 to 15 percent off the market price. a. Briefly explain the purpose of these stock purchase plans. b. Do you think the stock market would view these plans favorably or negatively (i.e., do you think the value of the stock would rise or fall after the announcement of these plans)? Briefly explain why. 3. (20) In Smalltown, PA, the demand function for men's haircuts is Qd = 500 - 30p +0.08 Y (where Qd is quantity demanded per month, p is the price of a haircut, and Y is the average monthly income in the town). The supply function for men's haircuts is Qs = 100 + 20p - 20w (where Qs is the quantity supplied and w is the average hourly wage of barbers). Answer the following questions (use Excel if you wish). a. If Y = $5,000 and w = $10, calculate quantity demanded and quantity supplied for p=$5. p=$10, p=$15, p=$20, p=$25, and p=$30. Calculate Excess Demand or Excess Supply at each price (you may express Excess Supply as negative Excess Demand). Show your results in a table. Determine the
