PART 2 - Short Answer, 7 points overall, point values are indicated for each part of...

Question:

PART 2 - Short Answer, 7 points overall, point values are indicated for each part of the question. You need to show your work and/or explain your reasoning to receive full credit. 1. Suppose Netflix currently offers two plans to stream television shows and movies. The Basic plan normally costs $11 per month, while the Premium plan normally costs$18 per month. The Premium plan includes the ability to watch on multiple screens at the same time and the ability to watch in high definition (HD) and ultra-high definition (UHD). Both packages allow for the option to chill while watching. In a bold strategic move, Netflix decides to lower the prices to $9 per month for Basic and$14 per month for Premium. When they do this, the number of subscribers for the Basic service rises from 75 to 85 million, while the number of premium subscribers increases from 25 to 35 million. a. (3 points) Calculate the price elasticity of demand for each of the packages offered by Netflix. This should be two separate elasticity calculations. NOTE: you can use 75 rather than 75,000,000 (and so on) when you calculate percentage changes. b. (2 points) Based on part a, how would you characterize demand for each type of service? Explain why the price elasticities might differ across the two plans, and whether or not you think the results here make sense. C. (2 points) Discuss whether the decision to lower prices was a good one. Then explain (briefly) how Netflix could use the information from these calculations to maximize revenue.

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