UniversityofToronto,DepartmentofEconomics,ECO20420092010.

AjazHussain
Test1
FILLOUTINFORMATIONASITAPPEARSINROSI

LASTNAME:

FIRSTNAME:

MIDDLENAME:

UTORONTOID#:

SIGNATURE:

SCORES
Question Points Score
1 20
2 10
3 25
4 45
BonusQuestion 5
TOTALSCOREOUTOF100

YOUMUSTSTAYSEATEDDURINGTHELAST10MINUTESOFTHETESTWAITUNTILALLTESTSARECOLLECTED
ALLPARTSAREWORTH5POINTS.ONLYAIDALLOWED:ACALCULATOR.

FORYOURCONVENIENCE,THEREISAWORKSHEETATTHEENDOFTHISTEST

KEEPANSWERSBRIEF.TOEARNCREDIT,SHOWCALCULATIONSANDGIVEARGUMENTSTOSUPPORTYOURANSWERS

Goodluck!
Page1of17
Question1
Pleaseanswerthequestionsfollowingthisarticle.
WALL STREET JOURNAL, OCTOBER 29
TH
, 2009
HIGH PRICE FOR IPHONE IN CHINA WILL TEST THE APPETITE FOR APPLE
Page2of17
By LORETTA CHAO
BEIJINGApple Inc. is a master at creating buzz around
its product launches. But as the popular iPhone
approaches its official debut in Chinathe world's largest
mobile-phone marketconsumers here seem anything b
excited.
ut
The buzz-killer is price. China Unicom (Hong Kong) Ltd.,
which will start selling the device Friday, is offering a
version of the 32-gigabyte iPhone 3GS for 6,999 yuan
($1,024) without a service contract, which is the most
popular way for people to purchase phones in mainland
China. That compares with about the $800 consumers pay for the same product in nearby Hong Kong,
which has different wireless carriers.
When wrapped together with a service plan, as is generally done in the U.S., the phone will cost Chinese
subscribers at least $3,120 over two years, compared with the roughly $2,600 cost for the same period
for customers in the U.S.
"It's too expensive," says Marco Bai, a teacher in Beijing. He currently uses a smart phonea handset
with souped-up functions like email and videomade by a Chinese domestic brand that cost him about
$205. "There are many smart phones with similar functions" to the iPhone in China, he says. "And they
are all cheaper."
China has an estimated 710 million mobile-phone subscribers, according to government figures. But the
average customer pays less than $15 for monthly service and only 7.5% of the handsets sold in the
country last year were smart phones like the iPhone. The average smart phone in China costs about
$350, estimates research firm IDC.
But China's smart-phone market is growing quickly, as all three Chinese carriers this year have deployed
new third-generation, or "3G," networks. The higher transmission speeds of 3G enable functions like
wireless video that are well suited for smart phones.
The market is also becoming more competitive, with a host of new devices being released, including
several that run Google Inc.'s Android software. And Nokia Corp., which sells more than a third of all
cellphones in China, has been focusing on making devices more affordable, an effort Nokia executives
say is designed to "democratize" the smart-phone market.



A successful iPhone roll out would raise Apple's profile in China, where despite the market's enormity it
has only one store and where its Macintosh computers make up less than 1% of all unit shipments.
Unicom, long a laggard to rival China Mobile Ltd., is a less savvy marketer than many of the carriers
Apple is used to dealing with, analyst say.
On Tuesday, Unicom ran a plain-text announcement in Chinese newspapers for its planned launch party
Friday with black text under a red headline. The ad resembled the type of official government notice that
many Chinese readers usually ignore.
Dennis Chen, chief executive of Shanghai-based dopod Communications Corp., which sells dopod
branded smart phones made by HTC Corp., says the iPhone's entry won't roil the local market. The
Unicom iPhone's "price is very highhigher than in many other places," he says. "It's a bit different from
what consumers were hoping... It won't have a big impact on us."
China's three mobile operators, all of which are state-owned, don't control handset sales the way U.S.
carriers do. Instead, users have typically been able to buy whatever phones they want, and use them with
whichever service. That means that users can easily buy iPhones that are sold overseas and brought into
China for resale, though not with 3G functions. Those gray-market devices sell for as much as 30% below
the price Unicom plans to charge.
What's more, the Unicom iPhones have been modified to remove the Wi-Fi function to meet Chinese
government regulations on wireless Internet technology in cellphones. Gray-market phones have Wi-Fi.
Already, an estimated two million iPhones are in use in China, according to analyst Fang Meiqin of BDA
China Ltd. The research firm estimates that two million to three million more iPhones will be sold in 2010,
including those from Unicom and those sold on the gray market. "Given the high prices of China Unicom's
iPhone, I'm afraid the smuggled ones might still be very popular," she says.
It's unclear how much of the price Unicom is charging was decided by the Chinese company and how
much by Apple. China Unicom didn't respond to requests for comment. Apple also didn't respond.
Many analysts had expected the iPhone to give Unicom a leg up on larger rival China Mobile in attracting
customers. When Unicom announced the iPhone deal in August, its president, Lu Yimin, said the Chinese
company aimed to take more than a third of China's 3G wireless market next year. But Unicom has
revealed little about its strategy for the device.
Page3of17
Apple products have bucked normal price expectations before in other markets, although it has lowered
prices on the iPhone several times since its U.S. debut in 2007. Analysts say Unicom may have decided
to target the high end initially to gauge demand and avoid the risk Apple's supply can't meet local market
demand.
The Unicom iPhone "is a device that is aimed at people who absolutely must have an iPhone here," said
David Wolf, chief executive of Wolf Group Asia, a Beijing-based marketing strategy firm. "I think they're
counting on the fact there's enough pent-up demand."
(a)Whatisthecostofa2yearserviceplanfora32GBiPhone3GSphone?

(b)Whatisthecostofa2yearserviceplanforanaverageChinesesmartphone?

Page4of17
(c)SupposeallChineseconsumershavetheutilityfunction:

u = o
1
+ [
2

Heregood1isiPhonehandsetsandgood2isChinesesmartphonehandsets.Whatisautility
functionofaconsumerwhobuysaniPhonehandsetinsteadofaChinesesmartphone
handset?Explainusinggraphsifnecessary.

Page5of17
(d)NowsupposeallChineseconsumershavetheutilityfunction:

u = o
1
+ [
2

Heregood1isiPhonehandsetsplus2yearserviceplan,andgood2isChinesesmartphone
handsetsplus2yearserviceplan.WhatisautilityfunctionofaconsumerwhobuysaniPhone
witha2yearserviceplan?Explainusinggraphsifnecessary.

Page6of17
Question2
Supposeaconsumerhasthefollowingutilityfunction:
u = min(E
1
, 2E
2
, E
3
)
HereE
1
istheexpenditureongood1,E
2
istheexpenditureongood2,andE
3
isthe
expenditureongood3.Theconsumerhas(exogenouslygiven)income.
(a)Isitpossibletosolvefortheoptimalexpendituresongoods1,2and3bytheLagrangean
approach?Ifyousayyes,explainwhy.Ifyousayno,explainwhynot.

(b)Solvefortheoptimalexpendituresongoods1,2and3.Showallsteps.
Page7of17
Question3
Aconsumerhastheutilityfunction:
u = m
1
,
2
ax _
1
Page8of17

(a)Graphtheindifferencecurvesforu = 1 andu = 2.
2
]

(b)ConsiderthebundleA = (1, 4)andthebundleB = (2, 2).WhatisbundleC,the60:40

combinationofbundlesAandB?GraphbundlesA, B, C below(notabove).
Page9of17

(c)Doesthisconsumerhaveconvexpreferences?Proveyouranswergraphicallyand
numerically.

(d)SupposeP
1
= $2u, P
2
= $S, = $2u.Whatarethisconsumersoptimalgood1,optimal
good2andoptimalutility?
Page10of17

(e)Isitpossiblethatatanyonetime,theconsumercaneitherbuygood1orgood2?Givea
briefexplanationusinggraphstoillustrateyouranswer.

Question4
Therearetwopartstothisquestion:inpartAyouwillanalyzeaconsumerandinpartByouwill
analyzeacompany.
PARTA
Apricetakingconsumerhastheutilityfunction:
u =
2
-
(
1
- o)
2
2[

Theparameters o, [ > u.Supposegoods1and2haveuniformpricesP

1
, P
2
respectivelyand
theconsumerhas(exogenouslygiven)income.

(a)Whattypeofutilityfunctionisthis?Aonesentenceexplanationsuffices.

(b)Assumingtheconsumersexpenditureequalsherincome,solvefortheoptimalchoiceof
1
.
Showallsteps.Note:Donotsolvefor
2
andyoudonthavetocheckifthisconsumerhas
monotonicpreferences.

Page11of17
(c)Forthis
Page12of17

S.AjazHussain,Dept.ofEconomics,UniversityofToronto(St.George)
partonly,assumethatP
2
= 1.ForwhatvaluesofP
1
isthedemandforgood1
elastic?Showallcalculations.

(d)Whatischangeintheconsumersoptimalutilityifherincomeincreasesby$0.50?Forthis
partassumeP
2
= $1.

(e)WithoutsolvingtheUMP,brieflyexplainwhethertheoptimalchoicesfromtheUMP:
max

1
,
2
u = ln
2
-ln
(
1
- o)
2
2[
s.t. P
1

1
+ P
2

2
=

willcoincidewith(i.e.beidenticalto)theoptimalchoicesfromtheUMP:
max

1
,
2
u =
2
-
(
1
- o)
2
2[
s.t. P
1

1
+ P
2

2
=

Page13of17
PARTB
ForPartB,assumeP
2
= 1.Supposetheresonecompanysellinggood1.Thefollowingtable
givespriceandsalesdataforAugust2009November2009:

PriceandSalesFiguresforGood1
August2009 September2009 October2009
Price $1 $2 $3
QuantitySold 90 80 70

(f)Computethepriceelasticitybetweenanytwoadjacentperiods(i.e.eitherbetweenAugust
SeptemberorSeptemberOctober).Donotusethedemandcurveinthisquestionandshowall
steps.

(g)Derivethiscompanysdemandcurve(priceontheyaxisandquantityonthexaxis).Show
allsteps.

Page14of17
(h)Supposethecompanyscustomerscanberepresentedbyasinglerepresentative
consumerwhohastheutilityinPartA.Whatistherepresentativeconsumersutility
function?

(i)Supposethecompany e choosestheSeptemberpric to:

max

1
R = P
1

1
subject to
1
= Capacity = c
IfyousolvethisproblembytheLagrangeanmethod,forwhatvalueofcapacitywillthe
Lagrangemultiplierequal0?Thatis,whenwillz=0?Showallstepsandexplainyouranswer
briefly.

Page15of17
BonusQuestion
SupposealargenumberofOntariansare(psychologically)addictedtonicotineand/or
gambling.WhatcanthegovernmentofOntariodotocureaddiction?Hint:howcanthe
governmentencourageaddictstoconsumeacombinationofnicotineandgambling?

____________________________________________________________________________________________
THEEND.NICE!

Page16of17
Page17of17
WORKSHEET