Warner Home Entertainment sold the Harry Potter and the Prisoner of Azkaban two-DVD movie set in China for about $3, which was only one-fifth the U.S. price, and sold about 100,000 units. The price was extremely low in China because Chinese consumers are less wealthy and because (lower quality) pirated versions were available in China for 72¢-$1.20, compared to the roughly $3 required to purchase the legal version (Jin Baicheng, "Powerful Ally Joins Government in War on Piracy," China Daily, March 11, 2005, 13). Assuming a marginal cost of $1, what is the Chinese elasticity of demand? Derive the demand function for China and illustrate Warner's policy in China using a figure similar to panel a in Figure 12.3.
Figure 12.3: Group Pricing of the Harry Potter DVD
(a) United States

(b) United Kingdom

Transcribed Image Text:

57 29 DWL, 5.8 11.8 Q, Million DVDS per year 39 DWL MA 2.0 4.1 Q. Million DVDS per year Pg.$ per DVD