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# Important information about Economics of internet

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1. You have estimated demand for the Sand Hill Journal Online to be different for Stanford students and venture capitalists on Sand Hill Road. You are proud of having come up with the demand functions and go in to visit with your CEO. You present the following demand functions:
Demand of Stanford students: QS = 100-P
Demand of venture capitalists: QV = 300 - 2P

Instead of congratulating you and sending you on your way, she immediately asks you the following questions. Assume that the cost function is TC = 9,000 + 10Q

G. (Qualitative answer.) You suddenly realize that your demand estimates might have some uncertainty in them. How might you change the amount of surplus you give to the two types because of this?

https://brainmass.com/economics/utility-demand/important-information-economics-internet-56145

#### Solution Preview

G. (Qualitative answer.) You suddenly realize that your demand estimates might have some uncertainty in them. How might you change the amount of surplus you give to the two types because of this?

The answer depends on the degree of risk aversion of the firm. Because if the two demand curves are uncertain, the expected income will yield less utility than an income for certain. Therefore the firm should charge a relatively higher price to compensate for the uncertainty.

Also, we might approach this question by studying the elasticity of either group.
The price elasticity of demand for the product is

E = dQ/dP * (P/Q)

Then the E for students is Es = - P / Q
And E for VCs is Ev = -2 P/Q

Since the price elasticity for the VCs is higher, we would expect a large decrease in quantity with a small increase in price. Therefore, you would give them more surplus, i.e., charge a relatively low price than the two-price strategy to keep the customers.

On the other hand, the price elasticity of students is lower, and a large ...

#### Solution Summary

The solution determines how might you change the amount of surplus you would give to the type types because of the uncertainty in the demand estimates.

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