Consider a newspaper market served by a monopolist. The newspaper does not contain advertisements so that the only source of revenues are from selling the newspaper to readers. Demand for newspapers is

p = 1 q, where p is the price and q the number of sold newspapers.

(a) Determine the profit-maximising number of sold newspapers. What are the corresponding price and profit? Briefly explain your approach (maximum 100 words).[20 marks]

The newspaper now considers selling advertisement slots as well. Firms that advertise are interested in reaching as many readers as possible. However, the newspaper is concerned that readers might view ad messages as a nuisance.

Hence, the newspaper now faces two market segments (readers and advertisers) whose demand functions are as follows:

p = 1 q ds, r = 1 s + q,

where r is the price of an advertising slot, s is the number of advertising slots and d > 0 measures readers ad-aversion.

b. Determine the profit-maximising quantities and prices in both market segments. Calculate also the profits of the newspapers. Explain the effects of the parameter d on the outcomes (maximum 100 words).

[25 marks]

c. Market research suggests that readers ad-aversion is d = 1. Does the newspaper have an incentive not to sell advertising space in the newspaper? Would the results change if d = 5. Explain your results (maximum 100 words).

[25 marks]

d. Which outcome (ad messages or not) would be preferable from a readers point of view? Does the result depend on the value of d? Explain your results (maximum 250 words).